The On Balance Volume (OBV) serves as a beneficial technical indicator for traders involved in buying and selling activities. While many experienced investors or stock market participants may be familiar with this tool, this article aims to delve deeper into its functionality.
Understanding the Utility of On Balance Volume (OBV)
The On Balance Volume, or OBV, is an analytical tool that quantifies cumulative buying and selling volume to determine the intensity of buying and selling pressure. Its primary function is to validate the trend direction and specify potential price reversals. This innovative tool was introduced by Joe Granville, and according to Granville's theory, volume precedes price, implying that volume data can indicate future price direction.
OBV adjusts upwards when the volume of a trading day is higher than the volume of the previous trading day. Conversely, OBV adjusts downwards when the volume of a trading day is higher than that of the previous trading day.
- Upward adjustments in OBV indicate that prices are likely to increase in the future.
- Downward adjustments in OBV indicate that prices are likely to decrease in the future.
It's worth mentioning that the specific OBV value doesn't carry much weight, and analysts typically focus more on the OBV's directional changes.
Confirming Trends with OBV
OBV can verify the direction of price volatility. If the OBV aligns with the price movement, it signifies an agreement between the volume and price, affirming the trend's direction. Conversely, when the OBV diverges, and the price adapts accordingly, it proves the possibility of a trend reversal.
Observing Divergence
Divergence signals can indicate a possible trend reversal in price.
Bullish Divergence: The price hits a new low, but the OBV starts to rise, indicating a bullish divergence signal and potentially forecasting an upward adjustment.
Bearish Divergence: The price touches the previous high, but the OBV begins to form a lower high, indicating a bearish divergence and potentially predicting a downward adjustment.
Conclusion
The On Balance Volume (OBV) is a relatively straightforward, efficient technical indicator that assesses buying and selling pressure based on trading volume. Traders can employ OBV to validate the trend's direction and identify potential price reversals by observing divergence. Furthermore, when combined with other tools, OBV can enhance effectiveness and increase profit opportunities in trading.
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Updated
10 months ago
(Jun 19, 2023 17:28)
