On-balance volume
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On-balance volume
technical analysis method that attempts to pinpoint when a stock, bond, or commodity is being accumulated by many buyers or is being distributed by many sellers. The on-balance volume line is superimposed on the stock price line on a chart, and it is considered significant when the two lines cross. The chart indicates a buy signal when accumulation is detected and a sell signal when distribution is spotted. The on-balance method can be used to diagnose an entire market or an individual stock, bond, or commodity.
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On-balance volume
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On-balance volume
On-balance volume (OBV) is a technical analysis indicator intended to relate price and volume in the stock market. OBV is based on a cumulative total volume.[1]
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Contents
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The formula
Application
Total volume for each day is assigned a positive or negative value depending on prices being higher or lower that day. A higher close results in the volume for that day to get a positive value, while a lower close results in negative value.[2] So, when prices are going up, OBV should be going up too, and when prices make a new rally high, then OBV should too. If OBV fails to go past its previous rally high, then this is a negative divergence, suggesting a weak move.[3]
The technique, originally called "cumulative volume" by Woods and Vignolia, was later named in 1946, "on-balance volume" by Joseph Granville who popularized the technique in his 1963 book Granville's New Key to Stock Market Profits[1]. The index can be applied to stocks individually based upon their daily up or down close, or to the market as a whole, using breadth of market data, i.e. the advance/decline ratio.[1]
OBV is generally used to confirm price moves.[4] The idea is that volume is higher on days where the price move is in the dominant direction, for example in a strong uptrend more volume on up days than down days.[5]
Similar indicators
Other price × volume indicators:
See also
- Dimensional analysis — explains why volume and price are multiplied (not divided) in such indicators
References
- ^ a b c Joseph E. Granville, Granville's New Strategy of Daily Stock Market Timing for Maximum Profit, Prentice-Hall, Inc., 1976. ISBN 0-13-363432-9
- ^ On Balance Volume ( OBV ). 22 September 2007.
- ^ OBV Behaviorial Limitations and Formulas at Financial-edu.com.
- ^ What Does On-Balance Volume Mean
- ^ StockCharts.com article on On Balance Volume
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Barron's Finance & Investment Dictionary
Dictionary of Finance and Investment Terms. Copyright © 2010 by Barron's Educational Series, Inc. All rights reserved.
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