The On Balance Volume Indicator (OBV)

The On Balance Volume Indicator

 

With Volume being such a key (and often under-utilized) parameter in the markets, one indicator stands out for a couple of specific uses – identifying Reversal points in a stock.

 

The indicator is the On Balance Volume (OBV). To explain it simply, it tries to measure if money is coming into a stock or going out. It adds the current day’s volume to the a running cumulative total if the day was up (which means there was more buying activity). And it subtracts a day’s volume from the running total if it was a down day. By doing this, it adds a layer of analysis that combines price and volume in one indicator.

 

For the most part, the indicator simply confirms the price trend. Where it is most useful is when it shows a divergence from Price.

 

Check out this video to see what I mean..To get specific actionable trade ideas like this, please visit our Trading Ideas page

 

 

2 Comments

  • John

    Reply Reply February 22, 2013

    Hari what is the rationale of adding an entire day’s volume to the total. I’m sure on any given day there is a mix of both

    • Hari Swaminathan

      Reply Reply February 24, 2013

      Good question John. I think the indicator will average out over a period of time. What I mean is – let’s say today’s volume was an up day and of course there is going to be some selling also. But if yesterday was a down day, we can be sure that there was some buying too. So over a period of time, these minorities will tend to even out. And what you have left is a trend that combines price and volume together into 1 indicator. It makes sense to me, let me know if you disagree

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