Trading with OBV/Volume

** Golden Rules of VOLUME**

Summary:Volume/traders if agree with price direction participate more

Raising Volume and Raising Price-Bullish

Falling Volume and Falling Price-Bullish

Raising Volume and Falling Price-Bearish

Falling Volume and Raising Price-Bearish

My analysis:

• Before you plot OBV make sure it has liquidity, i make sure that a stock is trading at least 2 million before i can plot OBV.
• While using OBV use trend lines to identify slope an trend direction.
• I found it easier to see OBV behaviour in weekly and monthly charts than daily charts.
• OBV/ Volume adds as a support from market especially important during breakout.
• Associate OBV with candlestick reversal patterns.
• A technique as per Leon Wilson is when OBV is greater than 13 period MA of OBV then its a positive sign. An upward cross over of the OBV indicator above its MA is considered Bullish or buy signal and vice versa for Sell signal.

 

Volume:

*To state and rule more precisely volume should increase or expand in the direction of existing trend.In an uptrend,volume should be heavier as the price moves higher, and should decrease or contract on price dips.As long as this pattern continues, volume is said to be confirming the price trend.

OBV:

OBV attempts to detect when a financial instrument (stock, bond, etc.) is being accumulated by a large number of buyers or sold by many sellers.

If the OBV is moving in the same direction as the existing trend, it is a signal that the strength of the trend remains. When the OBV starts to move against the trend, it is a signal that the existing trend is weakening and may reverse.

Possible combinations of OBV with Price

1. OBV sloping Up with Price
2. OBV Sloping Down with Price
3. OBV is sloping Down while the price of an asset is trending upward

1.OBV sloping Up with Price: Use an upward sloping OBV to confirm an uptrend

2.OBV Sloping Down with Price: Use an downward sloping OBV to confirm an downtrend

3.OBV is sloping Down while the price is trending upward : IF OBV is sloping downward while the price of an asset is trending upward can be used to suggest that the "smart" traders are starting to exit their positions and that a shift in trend may be coming.

If the security's price movement precedes OBV movement, a "non-confirmation" has occurred. Non-confirmations can occur at bull market tops (when the security rises without, or before, the OBV) or at bear market bottoms (when the security falls without, or before, the OBV).

The OBV is in a rising trend when each new peak is higher than the previous peak and each new trough is higher than the previous trough. Likewise, the OBV is in a falling trend when each successive peak is lower than the previous peak
and each successive trough is lower than the previous trough. When the OBV is moving sideways and is not making successive highs and lows, it is in a doubtful trend. [See Figure 47]
Figure 47

 

Once a trend is established, it remains in force until it is broken. There are two ways in which the OBV trend can be broken.

The first occurs when the trend changes from a rising trend to a falling trend, or from a falling trend to a rising trend.
The second way the OBV trend can be broken is if the trend changes to a doubtful trend and remains doubtful for more than three days.

Thus, if the security changes from a rising trend to a doubtful trend and remains doubtful for only two days before changing back to a rising trend, the OBV is considered to have always been in a rising trend. When the OBV changes to a rising or falling trend, a "breakout" has occurred. Since OBV breakouts normally precede price breakouts, investors should buy long on OBV upside breakouts. Likewise, investors should sell short when the
OBV makes a downside breakout. Positions should be held until the trend changes (as explained in the preceding paragraph).
This method of analyzing On Balance Volume is designed for trading short-term cycles. According to Granville, investors must act quickly and decisively if they wish to profit from short-term OBV analysis.

Example
The following chart shows Pepsi and the On Balance Volume indicator. I have
labeled the OBV Up, Down, and Doubtful trends.
A falling trend, as you will recall, is defined by lower peaks and lower troughs.
Conversely, a rising trend is defined by higher peaks and higher troughs.

 

From

Technical Analysis of the Financial Markets By John J. Murphy

 

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JAPANESE CANDLESTICK CHARTING TECHNIQUES -by STEVE NISON

OBV is also used in lateral price ranges. If OBV escalates and prices are stable (preferably at a low price area) it would exhibit a period of accumulation. This would bode well for advancing prices. If prices are moving sideways and OBV is declining it reflects distribution. This would have bearish implications, especially at high price levels.

 

OBV with Candlesticks
As illustrated in Exhibit 15.3, the June 13 heavy selloff of silver was followed by a small real body. This harami pattern converted the strong downtrend into a lateral trend. The market traded sideways for the next few weeks. During that time, OBV was ascending reflecting a bullish accumulation. June 25 saw new price lows. These lows did not hold as evidenced by the hammer line formed on that session. The positive divergence in OBV, the failure of the bears to hold the new lows, and the hammer line supplied signs of a near-term bottom.