Volume Based Technical Analysis
On Balance Volume (OBV)
The On-Balance Volume (OBV) indicator was introduced by Joe Granville in 1963. The indicator simply adds up volume that accumulates during up-moves while subtracting volume that builds up during down-moves. Essentially, the indicator works as follows (using daily closing bars in this example): If the current daily session closes above the previous session's close, today's accumulated volume is added to the OBV; conversely, if the current session closes below the previous trading day's close, the volume that built up in today's session is subtracted from the OBV.
The OBV indicator can be used to confirm an existing trend run. A rising OBV line indicates a bullish market sentiment whereas a falling OBV line indicates a bearish mood. This follows logically since the indicator adds volume during an uptrend while subtracting it during a downtrend.
If dramatic changes (increases or decreases) occur to the OBV line without being accompanied by simultaneous price changes, this may indicate that an existing trend run will reverse course in the near future. As a rule dramatic increases in the OBV line during an uptrend are caused by volume surges. Under such circumstances, you will notice a sharp rise in the OBV line given a huge surge in volume added to the OBV line over a short period of time. On the other hand, during a downtrend, you may note a dramatic decrease in the OBV line, the result of a volume surge that occurs as a huge amount of volume is subtracted from the OBV line over a comparatively short time.
As you can see, there are similarities between the OBV indicator and our concept of buying and selling volume surges. During a downtrend, there comes a point where the "smart money" starts buying at a time where the "average investor" is still selling. This may lead to volume surges that over time can prompt a trend reversal to the upside. Likewise, during an uptrend, there comes a time where the "smart money" starts selling while the "average investor" is still buying. Evidence of this can be seen in volume surges that over time are followed by downside reversals.
Even though the OBV indicator may also be suited to spotting probable index reversal, we strongly believe that a proper evaluation of volume surges according to our methodology will better serve this purpose; however, the OBV Line certainly has its value as a confirming trend indicator. Below, we have compared a few advantages and disadvantages of the OBV Line and the Percentage Volume Oscillator:
|OBV Line|| ||PVO indicator|
|The OBV line does not generate absolute values. It is therefore difficult to use it objectively for historical data comparisons.||The PVO indicator generates absolute values, making it amenable to direct historical data comparisons (which can be used to establish critical volume surge levels).|
|An objective evaluation of "dramatic" increases or decrease in the OBV Line (caused by large volume surges) is difficult.||Because the PVO is an oscillator-type indicator, it becomes easy to evaluate (and compare) various volume surges objectively.|
|It is not easy to determine what constitutes "high" or "low" volume activity for a given session.||PVO values greater than 1 indicate high volume (i.e., high trading activity). PVO values below 1 indicate low volume (i.e., low trading activity).|
|By its construction, the OBV is a cumulative indicator. It can serve well to confirm a rising or falling trend. A rising OBV line indicates an uptrend; a falling line indicates a downtrend.||The PVO is not a cumulative indicator. In order to use it as a trend indicator, additional analysis is required.|
NEXT: Critical Volume
Copyright 2004 - 2013 Highlight Investments Group. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.
Our pages are constantly scanned. If we see that any of our content is published on other website, our first action will be to report this site to Google and Yahoo as a spam website.