How To Trade with On Balance Volume

On Balance Volume (OBV) is an indicator developed and pioneered by Joe Granville who was a prominent market and technical analyst. During his career, Joe Granville worked for several brokerage firms, including E.F. Hutton and later his own firm, Joseph Granville Securities. He was known for his market timing calls and the publication of his widely followed newsletter called “The Granville Market Letter.” Granville published his book titled “New Strategy of Daily Stock Market Timing for Maximum Profit“ in 1963. This book was where he introduced the On Balance Volume (OBV) indicator to the public. In this book, he outlined his theories and methodologies for technical analysis and explained how he developed the OBV indicator as a tool to predict potential changes in stock prices based on volume analysis. The book contributed significantly to his reputation and popularity as a market analyst and technical strategist. This article aims to provide traders with a comprehensive guide on how to use OBV effectively in their trading strategies. We will explore the concept and computation of OBV, its role in understanding market trends, and strategies for integrating it into a traders decision-making process. On Balance Volume (OBV) is a technical analysis indicator used to measure the flow of volume in a financial asset (e.g., a stock, currency pair, or commodity) over a specific period. Granville’s insight and contribution to technical analysis was that “VOLUME precedes price.” Granville theorized and believed that VOLUME determined “health” and provided insight into the supply and demand characteristics of the market. Before delving into the specifics of OBV, it is essential to understand the significance of volume in trading. Volume refers to the number of shares or contracts traded in a particular asset over a given period. By analyzing volume patterns, traders can gain insights into market strength, confirm trends, and identify potential reversals. The main concept behind OBV is that changes in trading volume can provide valuable insights into the strength of a price trend. OBV considers both the volume and price movement of an asset and attempts to identify trends and potential reversals. OBV serves multiple purposes in a trader’s toolkit. Firstly, it can help identify accumulation and distribution phases, indicating whether a security is being bought or sold heavily. Secondly, divergence between price and OBV can signal potential trend reversals. Moreover, OBV can be used to confirm the strength of trends, providing traders with more conviction in their trading decisions. Essentially, On Balance Volume (OBV) is a momentum-based technical indicator that assesses buying or selling pressure on an asset. Traders use it to predict trade direction and near-term price changes in stocks, making it a valuable tool for understanding sentiment. Based on its calculations, OBV can indicate either a bullish or bearish outcome, providing insights into potential market movements. Here’s how it works: What On Balance Volume is doing is differentiating between BUYING Volume and Selling Volume. The On Balance Volume calculation is a running total of buying volume and selling volume. A period’s volume is considered positive when you have an up close on the asset being tracked. A period’s volume is considered negative when the close is below the previous period’s close. 1. Calculation: The OBV is calculated by adding the trading volume of a particular period to the previous period’s OBV if the price of the asset closes higher, and subtracting the trading volume from the previous period’s OBV if the price closes lower. If the price remains unchanged from the previous period, the OBV stays the same. 2. Interpretation: When the OBV is rising, it indicates that buying volume is stronger than selling volume, suggesting a bullish trend. Conversely, when the OBV is falling, it suggests that selling volume is stronger than buying volume, indicating a bearish trend. Divergences between price and OBV can also provide useful signals. For example, if the price is making higher highs, but the OBV is making lower highs, it could indicate a potential reversal to the downside. The following table is a tabular format of calculating OBV over a 10-day window. The graphic shows the closing price, and segregates volume into Positive or negative volume based upon the closing price. Traders often use OBV in conjunction with other technical indicators to confirm trends and identify potential buying or selling opportunities. In the realm of market analysis, the On Balance Volume (OBV) indicator indicates the notion that volume holds the key to price movements. With this conviction, the OBV can serve as a signal when volume spikes significantly, without causing a corresponding change in the asset’s price. This, in turn, becomes a telltale sign that shrewd institutional investors and other savvy market players are taking strategic positions in anticipation of a shift in crowd sentiment. Granville was a huge believer in drawing trendlines on the OBV chart looking for breakouts and breakdowns in the OBV signal before it would be confirmed by the price action. Today OBV is a popular technical indicator found on most trading platforms. Many traders place a moving average on the OBV chart to clearly discern the trend in volume. This permits a trader to quickly determine whether the trend in volume is seeing price confirmation. Also, when the moving average of OBV is below the OBV value a rise in prices traditionally occurs. When the moving average of OBV is above the OBV value, traditionally a decrease in prices occurs. S&P 500 Chart with On-Balance Volume Strategically combining OBV with trendlines can often unlock the ability to predict market movements before they materialize. Furthermore, traders can leverage this tool in conjunction with other technical analysis indicators, such as the revered 200-day moving average, to confirm ultra-safe entry points into positions. By skillfully deploying these techniques and adopting the right strategies, traders can not only maximize their profits from the market but also minimize their exposure to risk, creating a winning formula for success. In the realm of market analysis, Joseph Granville’s groundbreaking theory still holds sway: volume tends to lead price. With his brainchild, the On Balance Volume (OBV) indicator, he shed light on how this concept plays out in the markets. The mechanics of OBV are quite straightforward. On days when buying volume outpaces selling volume, the OBV surges upward, reflecting positive volume pressure that can pave the way for higher prices. Conversely, when selling volume dominates, the OBV takes a dip, hinting at potential lower prices on the horizon. Granville was astute in his observation that OBV often acts as a harbinger, moving ahead of price movements. What sets the OBV apart from other indicators is that it’s not the absolute value that traders should fixate on, but rather the characteristics of the OBV line. Three crucial steps guide traders in making sense of this indicator. First, they must define the trend for OBV, establishing its trajectory. Since volume can be quite choppy and vary wildly from day to day, traders often apply a moving average to OBV to be able to quickly discern the trend. The price movement is expected to align with the On Balance Volume (OBV), and any abrupt changes in OBV may indicate an imminent reversal in price trends. However, given that OBV is considered a leading indicator that provides early signals, it is prudent to exercise caution and await confirmation through a trendline break or the validation of another indicator to corroborate the signals from OBV. Second, they must assess whether this trend aligns with the underlying security trend. And third, keeping an eye out for potential support or resistance levels, as breaks in these levels could signal a change in OBV trend, providing traders with valuable signals. It’s important to bear in mind that OBV derives its insights from closing prices, requiring chartists to factor in these prices when seeking divergences or support/resistance breaks. Additionally, volume spikes can occasionally send the OBV into a tizzy, causing sharp movements that necessitate a settling period before clarity is restored. All in all, traders would do well to heed the wisdom of Joseph Granville and his pioneering OBV indicator, as it offers a window into market sentiment, allowing them to anticipate price movements and capitalize on profitable opportunities. Let’s apply OBV to some popular charts and trends so we can see the indicator in action. Here is a chart of APPLE (AAPL) over the past several months. $AAPL with On Balance Volume Technical Indicator Notice how the OBV trend is UP with higher APPLE prices. This is an indication of a healthy market as NET buying is occurring throughout all of the price fluctuations on the chart. Here is a 52-Week chart of GOLD with the OBV indicator. Observe how the trends in the OBV and price align whether the market was trending up, down or sideways. Gold Chart with On Balance Volume Confirmation Trend Analysis Many very successful traders do Stock market sector analysis by using the widely held ETF’s with On Balance Volume. Observe how the trend in VOLUME precedes the trend in price on the $QQQ ETF. $QQQ Invesco Trust with OBV Analysis Granville proposed that traders and investors draw trendlines on the OBV line to determine support and resistance levels while would precede price movements. $QQQ Invesco Trust with Support & Resistance Trendlines on OBV ADVANTAGES OF OBV: One of the coolest things about OBV is that it gives us a keen insight into where “smart money” is positioned. It’s like having radar to track the moves of the big players in the market. OBV brings a whole new level of objectivity to your trading game. Why? Who has the most influence over the market’s total flow activities? Yep, you guessed it – the institutional investors. OBV is here to help us measure those trends. It’s like having a telescope to peer into the minds of the biggest players in the market. DISADVANTAGES OF OBV: Being a leading indicator, OBV can sometimes throw us a curveball when unexpected fundamental events occur. For example, when a corporate earnings report drops like a bombshell, or some major macroeconomic data takes us by surprise. Those sudden changes in sentiment can lead to false signals in the indicator because of huge variances in volume which are very short lived. In conclusion, for traders seeking a competitive edge in the market, closely tracking the volume of an asset is an essential practice. Why? Because volume, especially the insightful On Balance Volume (OBV), serves as a powerful indicator of whether net buying or net selling is taking place. Understanding volume is the key to deciphering the forces driving price.. [Image] Here are Some More Investing Tips and Resources. Enjoy! Sponsored [Elevate Your Investment Game with the Hottest AI Stocks of 2023 - Down]( Are you ready to supercharge your investment portfolio with cutting-edge Artificial Intelligence (AI) stocks? 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In this book, he outlined his theories and methodologies for technical analysis and explained how he developed the OBV indicator as a tool to predict potential changes in stock prices based on volume analysis. The book contributed significantly to his reputation and popularity as a market analyst and technical strategist. This article aims to provide traders with a comprehensive guide on how to use OBV effectively in their trading strategies. We will explore the concept and computation of OBV, its role in understanding market trends, and strategies for integrating it into a traders decision-making process. On Balance Volume (OBV) is a technical analysis indicator used to measure the flow of volume in a financial asset (e.g., a stock, currency pair, or commodity) over a specific period. Granville’s insight and contribution to technical analysis was that “VOLUME precedes price.” Granville theorized and believed that VOLUME determined “health” and provided insight into the supply and demand characteristics of the market. Before delving into the specifics of OBV, it is essential to understand the significance of volume in trading. Volume refers to the number of shares or contracts traded in a particular asset over a given period. By analyzing volume patterns, traders can gain insights into market strength, confirm trends, and identify potential reversals. The main concept behind OBV is that changes in trading volume can provide valuable insights into the strength of a price trend. OBV considers both the volume and price movement of an asset and attempts to identify trends and potential reversals. OBV serves multiple purposes in a trader’s toolkit. Firstly, it can help identify accumulation and distribution phases, indicating whether a security is being bought or sold heavily. Secondly, divergence between price and OBV can signal potential trend reversals. Moreover, OBV can be used to confirm the strength of trends, providing traders with more conviction in their trading decisions. Essentially, On Balance Volume (OBV) is a momentum-based technical indicator that assesses buying or selling pressure on an asset. Traders use it to predict trade direction and near-term price changes in stocks, making it a valuable tool for understanding sentiment. Based on its calculations, OBV can indicate either a bullish or bearish outcome, providing insights into potential market movements. Here’s how it works: What On Balance Volume is doing is differentiating between BUYING Volume and Selling Volume. The On Balance Volume calculation is a running total of buying volume and selling volume. A period’s volume is considered positive when you have an up close on the asset being tracked. A period’s volume is considered negative when the close is below the previous period’s close. 1. Calculation: The OBV is calculated by adding the trading volume of a particular period to the previous period’s OBV if the price of the asset closes higher, and subtracting the trading volume from the previous period’s OBV if the price closes lower. If the price remains unchanged from the previous period, the OBV stays the same. 2. Interpretation: When the OBV is rising, it indicates that buying volume is stronger than selling volume, suggesting a bullish trend. Conversely, when the OBV is falling, it suggests that selling volume is stronger than buying volume, indicating a bearish trend. Divergences between price and OBV can also provide useful signals. For example, if the price is making higher highs, but the OBV is making lower highs, it could indicate a potential reversal to the downside. The following table is a tabular format of calculating OBV over a 10-day window. The graphic shows the closing price, and segregates volume into Positive or negative volume based upon the closing price. Traders often use OBV in conjunction with other technical indicators to confirm trends and identify potential buying or selling opportunities. In the realm of market analysis, the On Balance Volume (OBV) indicator indicates the notion that volume holds the key to price movements. With this conviction, the OBV can serve as a signal when volume spikes significantly, without causing a corresponding change in the asset’s price. This, in turn, becomes a telltale sign that shrewd institutional investors and other savvy market players are taking strategic positions in anticipation of a shift in crowd sentiment. Granville was a huge believer in drawing trendlines on the OBV chart looking for breakouts and breakdowns in the OBV signal before it would be confirmed by the price action. Today OBV is a popular technical indicator found on most trading platforms. Many traders place a moving average on the OBV chart to clearly discern the trend in volume. This permits a trader to quickly determine whether the trend in volume is seeing price confirmation. Also, when the moving average of OBV is below the OBV value a rise in prices traditionally occurs. When the moving average of OBV is above the OBV value, traditionally a decrease in prices occurs. S&P 500 Chart with On-Balance Volume Strategically combining OBV with trendlines can often unlock the ability to predict market movements before they materialize. Furthermore, traders can leverage this tool in conjunction with other technical analysis indicators, such as the revered 200-day moving average, to confirm ultra-safe entry points into positions. By skillfully deploying these techniques and adopting the right strategies, traders can not only maximize their profits from the market but also minimize their exposure to risk, creating a winning formula for success. In the realm of market analysis, Joseph Granville’s groundbreaking theory still holds sway: volume tends to lead price. With his brainchild, the On Balance Volume (OBV) indicator, he shed light on how this concept plays out in the markets. The mechanics of OBV are quite straightforward. On days when buying volume outpaces selling volume, the OBV surges upward, reflecting positive volume pressure that can pave the way for higher prices. Conversely, when selling volume dominates, the OBV takes a dip, hinting at potential lower prices on the horizon. Granville was astute in his observation that OBV often acts as a harbinger, moving ahead of price movements. What sets the OBV apart from other indicators is that it’s not the absolute value that traders should fixate on, but rather the characteristics of the OBV line. Three crucial steps guide traders in making sense of this indicator. First, they must define the trend for OBV, establishing its trajectory. Since volume can be quite choppy and vary wildly from day to day, traders often apply a moving average to OBV to be able to quickly discern the trend. The price movement is expected to align with the On Balance Volume (OBV), and any abrupt changes in OBV may indicate an imminent reversal in price trends. However, given that OBV is considered a leading indicator that provides early signals, it is prudent to exercise caution and await confirmation through a trendline break or the validation of another indicator to corroborate the signals from OBV. Second, they must assess whether this trend aligns with the underlying security trend. And third, keeping an eye out for potential support or resistance levels, as breaks in these levels could signal a change in OBV trend, providing traders with valuable signals. It’s important to bear in mind that OBV derives its insights from closing prices, requiring chartists to factor in these prices when seeking divergences or support/resistance breaks. Additionally, volume spikes can occasionally send the OBV into a tizzy, causing sharp movements that necessitate a settling period before clarity is restored. All in all, traders would do well to heed the wisdom of Joseph Granville and his pioneering OBV indicator, as it offers a window into market sentiment, allowing them to anticipate price movements and capitalize on profitable opportunities. Let’s apply OBV to some popular charts and trends so we can see the indicator in action. Here is a chart of APPLE (AAPL) over the past several months. $AAPL with On Balance Volume Technical Indicator Notice how the OBV trend is UP with higher APPLE prices. This is an indication of a healthy market as NET buying is occurring throughout all of the price fluctuations on the chart. Here is a 52-Week chart of GOLD with the OBV indicator. Observe how the trends in the OBV and price align whether the market was trending up, down or sideways. Gold Chart with On Balance Volume Confirmation Trend Analysis Many very successful traders do Stock market sector analysis by using the widely held ETF’s with On Balance Volume. Observe how the trend in VOLUME precedes the trend in price on the $QQQ ETF. $QQQ Invesco Trust with OBV Analysis Granville proposed that traders and investors draw trendlines on the OBV line to determine support and resistance levels while would precede price movements. $QQQ Invesco Trust with Support & Resistance Trendlines on OBV ADVANTAGES OF OBV: One of the coolest things about OBV is that it gives us a keen insight into where “smart money” is positioned. It’s like having radar to track the moves of the big players in the market. OBV brings a whole new level of objectivity to your trading game. Why? Who has the most influence over the market’s total flow activities? Yep, you guessed it – the institutional investors. OBV is here to help us measure those trends. It’s like having a telescope to peer into the minds of the biggest players in the market. DISADVANTAGES OF OBV: Being a leading indicator, OBV can sometimes throw us a curveball when unexpected fundamental events occur. For example, when a corporate earnings report drops like a bombshell, or some major macroeconomic data takes us by surprise. Those sudden changes in sentiment can lead to false signals in the indicator because of huge variances in volume which are very short lived. In conclusion, for traders seeking a competitive edge in the market, closely tracking the volume of an asset is an essential practice. Why? Because volume, especially the insightful On Balance Volume (OBV), serves as a powerful indicator of whether net buying or net selling is taking place. Understanding volume is the key to deciphering the forces driving price.. 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