ON-BALANCE VOLUME (OBV) – Key to your profits

When introduced first JOSEPH GRANVILLE called it a Key to Stock Market, as he saw volume as the basic factor for Price Movement, which has roots from Supply & Demand theory.

His theory of hypothesis is that, if Volume increases or decreases intensely, without any significant change Price, then it is appropriate to expect a dramatic change, either upward or downward in movement within a shorter time to come. Hence this may be an used as a leading indicator and we may even witness a visible change in the momentum of price & hence, is a momentum indicator too.

By comparing OBV with price action, traders can sense divergences that may lead to future price shifts, or to confirm existing price trends. An increasing OBV indicates positive volume pressure that may lead to higher prices. Conversely, falling OBV mirrors negative volume pressure that can foretel lower prices.

Granville noticed in his study that OBV would often move before price, meaning it works likea leading indicator. Expect prices to move higher if OBV is rising while prices are either flat or moving down. Expect prices to move lower if OBV is falling while prices are either flat or moving up.

It is more important to focus on how the OBV line moves rather than focusing on the absolute value of OBV. The process of understanding & leveraging the OBV signals are as follows

1. Determine the trend of OBV

2. Check if OBV trend is matching with the trend of the stock/instrument traded

3. Look for breaking support or resistance level

4. Once you notice the change in OBV trend, these can be used to get signals

5. When you look for divergence /breakout signals focus should be on closing price, as OBV calculation mainly considers closing price

WORD OF CAUTION

Any spike at this point may impact the quality of OBV signal as sharp movements may need time to settle down. Check the default setting with is normally based on SMA9. While increasing the range of the SMA may smoothen the curve, it may tend to delay the signal impacting the leading characteristics of the indicator. You may choose based on your trading style and risk tolerance levels