On Balance Volume - OBV
The on balance volume (OBV) indicator was developed by a fellow named Joseph Granville in 1963.
What makes OBV so useful is that it presents a more visual way to view the share price volume flow and compare it to the stock's price action.
Volume should increase in the direction of the price trend, and this indicator makes it easier to make sure that is happening.
If the direction of the OBV line is up, the line is bullish meaning that there is more volume on up days than on down days.
A falling OBV line signals that volume is heavier on down days, and is considered to be bearish.
For further in-depth information on Technical Indicators, this resource contains critical information to help you learn to use stock charts and technical indicators in a clear, simple and concise manner to improve your trade entries and exits in the stock market.
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OBV Uses
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On-balance volume has two major uses:
- Pre-signal price breakouts
- Price Divergences
Pre-signal price breakouts
Just before a price breakout (up or down), OBV will breakout BEFORE the stock price does. That is usually an early signal that the share price will follow in the same direction.
See the chart above
Price Divergences
OBV gives it's strongest signals when it diverges from prices. For example, on a Double Top chart pattern, on the second top of the stock, if OBV diverges and heads lower, this is a pre-signal that the stock price is ready to fall.
The opposite would be true on a Double Bottom chart pattern.
See the chart above.
As with this indicator, it is meant to be used in conjunction with other indicators.
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Recommended Technical Analysis Tools and Resources
Recommended Technical Stock Trading Software
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