What it is and how to use it
What is it?
On-Balance Volume (OBV) uses volume flow to predict changes in stock price and to project how volume influences market momentum. By combining price movement and volume, OBV provides a cumulative total that adds volume on up days and subtracts volume on down days. This cumulative value can indicate the strength of a trend and help identify potential reversals.
Who made it?
The OBV indicator was introduced by Joe Granville in his 1963 book "Granville's New Key to Stock Market Profits."
How is it calculated?
The OBV calculation involves adding or subtracting the volume based on the direction of the closing price. Here's how it works:
If the closing price is higher than the previous close, the current volume is added to the previous OBV.
If the closing price is lower than the previous close, the current volume is subtracted from the previous OBV.
If the closing price is the same as the previous close, the OBV remains unchanged.
OBV = OBV[1] + (volume × (close > close[1]) − volume × (close < close[1]) )
Code (ProRealTime)
How do you use it?
Trend Confirmation: OBV can be used to confirm trends. If OBV is rising, it confirms an uptrend. If OBV is falling, it confirms a downtrend.
Divergence:
Divergences between OBV and price can indicate potential reversals. For example, if the price is making new highs but OBV is not, it could signal a weakening uptrend and a potential reversal.
FAQ
Q: Is OBV a leading or lagging indicator?
A: OBV is a leading indicator. It uses volume flow to predict changes in stock price by adding volume on up days and subtracting volume on down days.
Q: How can OBV help in identifying entry and exit points?
A: OBV helps you spot entry and exit points by confirming trends and spotting divergences between price and volume, which can indicate potential trend reversals.
Q: What are the best market conditions to trade with OBV?
A: OBV is most effective in trending markets where it can confirm the direction of the trend and identify potential reversals based on volume flow.
Strategies using On-Balance Volume
None so far.
Comments