With a stable trading tool to help you calculate when you are buying stocks, your trading profit will dramatically enhance. But many traders, especially novice traders, are affected by analytical paralysis. Too many information, too many strategies, and indicators are generally available to any trader to master in full.
Executing volume centric momentum indicators provides you numerous key advantages, none the least of which is the primitiveness of reading. Momentum indicators serve to be very simple to interpret and can provide traders an important insight into market trends, On Balance Volume (OBV) On balance volume is a momentum indicator that was designed by Joe Granville in 1963.
The on balance volume indicator is intended to scale positive volume flow. The essential concept to recognize is that volume precedes price, and as such, including the flow of volume (into or out of stock) provides traders a leading indicator on market trends.
On Balance Volume is built like a running total of volume flow. Volume is added to the total when the price closes to the upside and subtracts from the total when price closes to the downside. This is a crucial concept that the indicator is based on closing prices, I’ll discuss why in a while. Traders use the OBV indicator to determine divergences between volume and price.
The interpretation of divergence as supplied by StockCharts.com, “situation that happens when two lines on a chart move in contrary directions vertically.” People often look for divergences by examining a stock’s direction to the direction of its RSI, its MACD or its Stochastic Oscillator. There are two classes of divergences: positive and negative. Positive divergence occurs when the indicator goes higher while the stock is sinking. A negative divergence happens when the indicator goes lower while the stock is advancing.
A divergence between On Balance Volume indicates that 1) institutional traders are taking profits, 2) volume is not supporting the current trend, and 3) that momentum is fading. A divergence in OBV opposing the direction a trader is looking to enter a stock is a warning signal against entry. OBV sloping positively in the direction of your trade would provide confirmation of your entry.
Strengths and Weaknesses of OBV
Strengths of OBV indicator includes simplicity in reading it while the weakness is that it has low ability in scanning trend reversal.However, OBV indicator does have a few weaknesses that traders need to be know: the key vulnerability of the OBV indicator is that it requires a full day’s price action to construct. Thus, it is not well suited to intraday trading activity. The consequent weakness of OBV turns around gaps in price. Since no trading volume occurs in a price gap, OBV discounts this piece of price movement. A prominent trader named Tom Bierovic developed a On Balance Volume derivative that he named On Balance True Range to compensate for this failure.
On Balance True Range (OBTR)
Before I address OBTR application, it should be understood that the volume and price movement of a stock have a significant statistical connection.
The MIT Laboratory for Information and Decision Systems report: Related relations between Trading Volume and Security Prices and Returns has been well-documented in statistical analyses for this connection.
True Range is called the first component of the OBTR Dynamics Indicator. True Range. True Range. As described by J, True Range. Welles Wilder is: True Range (TR) identified as the biggest: the present High less the present High.
The actual higher than the prior close is the absolute value. The absolute lower price is less than the preceding closing. If the present high-low portfolio is big, it can serve as the true portfolio. One of the other two techniques is probably employed when calculating the True Range if the present low variety is low. The last two options typically come when the preceding closure is more than the present one (referring to a prospective gap down or limit shift), or when the preceding close is less than the existing one (referring to the prospective gap up or limit movement).
Absolute values have been applied to variations to guarantee favorable figures. As you can see, true range is a measure of price motion, which is extremely linked to quantity, as mentioned previously. To produce On Balance True Range, Mr. Bierovic substituted the volume element of OBV with True Range. OBTR addresses the two weaknesses in the OBV.
Firstly, OBTR is up to date, and secondly, this indicator handles gaps correctly. To buy and sell signals, OBTR may also be combined with an average of nine days of motion (EMA). A bullish signal is produced when the OBTR crosses the EMA and when the OBTR passes under the EMA, a bearish sign is produced. The combination of OBTR with MACD OBTR with dual MACD can be a strong set of cost inputs (when to purchase inventory) and outputs (when to sell inventory).
A 12,26,9 MACD for buying signals is coupled with OBTR. Search for bullish cost divergence and bullish cross over in the MACD and OBTR for points of entry. A MACD 19,39,9 for selling signals is coupled with OBTR. Wait until the MACD shows a bearish cross, and check this signal using the OBTR-bearish divergence or crosses, or cross under 0 line.