Technical Analysis - Common Indicator Uses
OBV Indicators: Reading Quantity-Price Relationships, Speculating Market Sentiment
What does OBV mean?
The On Balance Volume, or OBV indicator, is a technical analysis indicator that predicts market trends by evaluating volume and price ratios.
The indicator was proposed by renowned stock analyst Joseph Granville in his 1963 book Granville's New Key to Stock Market Profits.
The OBV indicator is a cumulative value whose direction of movement depends on the price increase and fall. If the price goes up on the day, the day's trade will accumulate to the OVB value; if the price falls, the trade will subtract from the OVB value.
The OBV indicator is one of the earliest technical indicators used to assess the positive and negative relationship of trading volumes. Since changes in trading volumes often precede changes in price, “foresight, hindsight” is repeatedly validated in financial markets, which makes the OBV indicator an important reference value.
Parameters and calculation methods for OBV indicators
OBV Indicator Parameters
UNLIKE MOST TECHNICAL INDICATORS WITH CUSTOMIZABLE PARAMETERS, THE OBV INDICATOR HAS NO PARAMETERS, IS A CUMULATIVE VALUE, AND THEORETICALLY HAS NO UPPER AND LOWER LIMIT. The OBV value itself is irrelevant, the focus is on its changing trend.
Calculation method of OBV indicator
If the closing price on the day > the closing price of the previous day, the OBV value on the day = the OBV value of the previous day+the volume traded on the day
If the closing price on the day < the closing price of the previous day, the OBV value on the day = the OBV value of the previous day - the volume traded on the day
If the closing price on the day = the closing price of the previous day, then the OBV value on the day = the OBV value of the previous day
For example, suppose A stock has an OBV value of 50 million on D1 day.
dates | Closing price movement | Transaction Volume | OBV value changes | OBV value |
D1 | - | - | - | 50,000,000 |
D2 | -2% | 8,000,000 | -8,000,000 | 42,000,000 |
D3 | +1% | 6,000,000 | +6,000,000 | 48,000,000 |
D4 | 0% | 5,000,000 | 0 | 48,000,000 |
If the A stock fell by 2% on the closing day D2 and the trading volume was 8 million shares, then the OBV value on the D2 day =5000-800=4200 (million).
If the A stock increased by 1% at the close on D3 with a trading volume of 6 million shares, then the OBV value on D3 day =4200+600=4800 (million).
If A shares close flat on D4 with a trading volume of 5 million shares, then D4 OBV = 48 million, that is, remains unchanged.
In short, the price goes up, the OBV value increases; the price falls, the OBV value decreases; the increase and the decrease = the volume traded.
Core Highlights of the OBV Indicator
Over a period of time, the OBV indicator rises if the volume of trades on the rising day is greater than the volume on the falling day; vice versa.
An increase in OBV indicates an increase in buyer power; a decrease in OBV indicates an increase in seller strength.
When the price shows an uptrend at the same time as the OBV indicator, it is predicted that the uptrend may continue; when the price shows a downtrend at the same time as the OBV indicator, it is predicted that the downtrend may continue.
A reversal of the forecast trend may occur when price movements diverge significantly from the OBV indicator.
OBV Case Analysis
Case 1
Figure 1 shows that the share price is in an uptrend and the OBV indicator is fundamentally in line with the price movement. This situation indicates that the volume price relationship is reasonable, that is, the OBV indicator helps to confirm the current price movement.
Case 2
Figure 2 shows that the share price is in a downtrend, but the OBV indicator shows an upward momentum, which reflects the higher and lower points of the OBV indicator. This backwardness suggests a possible reversal in the share price.
Case 3
Figure 3 shows that the OBV index rate first broke through the key point. After some time, the stock price also broke through the corresponding horizontal resistance level.
Limitations of the OBV indicator
The OBV indicator is a leading indicator that can often release erroneous prediction signals. Therefore, in practice, OBV indicators need to be used in conjunction with some lagging indicators in order to achieve better results.
The OBV indicator may experience a “derailment” over a period of time due to a sharp rise in trading volumes and weaken its reference value. For example, large transactions between institutions may cause the OBV indicator to rise or fall significantly on a trading day, but this does not necessarily have a material effect on price trends.
Trading volume is not the absolute driver of a transaction. Many cases show that once the price trend is well established, the trend can persist even if the trading volume shrinks.
The OBV indicator is not suitable for analysts with low trading volumes.
OBV Overview
The OBV indicator is a technical analysis indicator that tracks trends in trading volume and can be used to identify and confirm market trends.
Many traders believe that changes in trading volume tend to lead to price changes, which makes the OBV indicator an important reference value.
It should be noted that some major events can trigger a large amount of trading in a short period of time, causing the OBV indicator to be distorted.
In real combat, OBV indicators should be used in combination with other technical analysis tools to achieve better results.
This content discusses technical analysis, and other approaches, including fundamental analysis, may provide different perspectives. The examples provided are for illustrative purposes only and do not reflect the expected results. All investments involve risk, including the potential loss of principal, which cannot guarantee the success of any investment strategy.
