On Balance Volume is an indicator which adds up, or subtracts the volume of the day to create a cumulative Volume indicator. When the price of the stock for that day has gone up, the V takes up a positive sign and it is added to the cumulative volume from the previous days. When the price of the stock has fallen for the day, then the volume takes a negative sign and it is subtracted from the cumulative value. Thus, OBV is a volume indicator that is dependent on the price of the stock as well.
OBV resembles the stock prices themselves since also stock prices are added/ subtracted every day thus we get the effect of stock price going up, or down.
With the same rationality, OBV goes up, or down as well.
The OBV is used in various way, one way is by identifying the stock trend and another way by identifying the strength of the stock, i.e. whether volume increases when price increases, or decreases when stock price decreases. Divergence from this also is useful, thus OBV is used to show an overbought, or oversold state at the current price of the stock.
Because daily volume may be thought to be random in the same way as daily stock price data are are also thought to be random, then a Moving Average of the OBV is taken to smooth out the curve. Therefore, the Moving Average of the OBV is usually the effective indicator to look at.
Sometimes, the Moving Average of the OBV is compared to the raw OBV and decisions for buying/ selling may be made this way, when the OBV crosses its own n- day OBV.
It can be said that this is a good Volume indicator to smooth out any daily volume data which cannot be trusted fully. Also, because this indicator takes in consideration also the stock price change, then it becomes useful in this respect, i.e. is dependent on stock price direction as well.
Weekly data can be taken as well. A popular value for n for the MA OBV is 9 days, therefore the 9 day MA of OBV is calculated this way.
OBV resembles the stock prices themselves since also stock prices are added/ subtracted every day thus we get the effect of stock price going up, or down.
With the same rationality, OBV goes up, or down as well.
The OBV is used in various way, one way is by identifying the stock trend and another way by identifying the strength of the stock, i.e. whether volume increases when price increases, or decreases when stock price decreases. Divergence from this also is useful, thus OBV is used to show an overbought, or oversold state at the current price of the stock.
Because daily volume may be thought to be random in the same way as daily stock price data are are also thought to be random, then a Moving Average of the OBV is taken to smooth out the curve. Therefore, the Moving Average of the OBV is usually the effective indicator to look at.
Sometimes, the Moving Average of the OBV is compared to the raw OBV and decisions for buying/ selling may be made this way, when the OBV crosses its own n- day OBV.
It can be said that this is a good Volume indicator to smooth out any daily volume data which cannot be trusted fully. Also, because this indicator takes in consideration also the stock price change, then it becomes useful in this respect, i.e. is dependent on stock price direction as well.
Weekly data can be taken as well. A popular value for n for the MA OBV is 9 days, therefore the 9 day MA of OBV is calculated this way.
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