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"Increase your trading skills by reading what other successful traders have done. Knowledge will always be the best tool for profits!" ~Myst~ |
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OBV
| Subject: On Balance Volume (OBV) |
Written by: Mystifier |
August 6th,1999 |
OBV is a running total of volume. It rises or falls each day (or period) depending on whether price closed higher or lower than the previous day (or period.....period, being the particular time frame you're watching...ie. weekly, daily, 60 minute, 5 minute, etc) If the stock closes higher all the volume for that day or period is added to OBV, and the OBV indicator rises. If the stock closes lower all the volume is subtracted and OBV falls.
Interpretation
Price represents the consensus of value, while volume represents the emotions of traders/investors. Volume tracks the intensity of the financial and emotional commitment of traders. Since OBV is a running total of Volume its a great way to track the changes in traders involvement in a stock. When OBV reaches a new high it shows the bulls are strong, the bears are in pain and prices are likely to rise. Vice-versa if OBV reaches a new low. OBV is a "leading indicator" meaning it usually precedes changes in price. When the pattern of OBV deviates from the pattern of prices, it shows that mass emotions are not in gear with mass consensus. A crowd is more likely to follow its heart than its mind. This is the main reason changes in volume often precede changes in price.
The following chart is a daily chart of Amazon.com with the OBV indicator at the bottom:
The significant part of this chart can be seen in mid June when price hit bottom but the change in OBV didn't confirm more downside, in fact it showed the downside volume was weak and the bulls still had control of the short term reversal that lasted till mid July. The important thing to know about OBV is that it's the trend that matters and not it's absolute value.
Trading Rules
OBV or any individual technical indicator should
never be used by itself when making decisions to buy, hold, or sell a stock. I feel
a variety of indicators in combination with information on the overall market, the
industry and sector, and certain fundamental data are necessary to come to a reasonable
assessment of a stock's potential direction.
When OBV reaches a new high, it confirms the uptrend,
signals higher prices are likely, and can be considered a buy signal. When OBV reaches a
new low, it confirms the downtrend, signals lower prices are likely, and can be considered
a sell signal or sell short signal.
The strongest signals OBV gives is if it diverges from
price. If prices rally, sell off, then rise to a new high, but OBV rallies to a
lower high, it creates a bearish divergence and gives a strong sell signal. If
prices decline, rebound, then fall to a new low, but OBV traces a shallower bottom (ie.
doesn't fall as far as its previous low), it creates a bullish divergence and can be
considered a buy signal.
(See June above)
When prices are in a trading range and OBV breaks out to a
new high, it gives a buy signal, (See
March above). When prices are in a trading range and OBV breaks out to
a new low, it gives a sell signal.
Mystifier
Copyright August 6th, 1999
Below are some recommended books on the subject, or you can do a search for yourself by using the amazon search box below:
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This article is the express property of Myst Werks © 1999 Mystifier - All Rights Reserved.
