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On Balance Volume Screener Trading Strategy

On Balance Volume Screener Trading Strategy How to use OBV Indicator

On balance volume (OBV) uses volume to predict security worth movements before. Like alternative
volume-based indicators, like the negative volume index, Klinger volume generator, and cash flow
index, it’ll work solely on markets with exchange volume related to them.

The OBV works by keeping a running tally on volume in accordance with the direction of a security.
When the security increases in price, the volume is added to the running total making up the OBV figure.
When the security decreases in price, the volume is subtracted from the running total making up the OBV figure.
When the indicator was developed in the 1960s, the idea was that when volume decreases without an
accompanying move in the security, a down move would soon expectedly follow. Similarly,
if volume increases without an attendant rise in the security, an upward move is expected to follow

Example Calculation of On Balance Volume
Let’s take a theoretical daily set of share worth and share volume numbers.
We’ll then translate this to in any case volume changes.

 

Day 1 = $20.00 share price; volume = 20,000 shares
Day a pair of = $20.20 share price; volume = 22,000 shares
Day three = $20.05 share price; volume = 24,000 shares
Day four = $20.15 share price; volume = 18,000 shares
Day five = $20.12 share price; volume = 13,000 shares
The general idea is that each day the share price is up,

OBV increases by the share volume count. On each day the share price is down, OBV decreases by the share volume count

Day 1: OBV = 0
Day 2: OBV = 0 + 22,000
Day 3: OBV = 22,000 – 24,000 = -2,000
Day 4: OBV = -2,000 + 18,000 = 16,000
Day 5: OBV = 16,000 – 13,000 = -3,000

OBV, as demonstrated from this calculation, can be both negative and positive.
It also oscillates between positive and negative values as shown on this particular chart of the S&P 500 below

 

particular chart

 

Its value is also dependent on the starting point of the calculation. Since volume is additive once the quality will increase in worth,
the OBV will tend to follow the general trend of the market. It will tend to increase in uptrends and decrease in downtrends

Uses of On Balance Volume

Like the negative volume index, in the end, the volume is meant to see once the “smart” cash and “not-so-smart”
cash square measure active. It is believed that the money that predominantly moves markets –
institutional funds – are most active on low volume days while retail traders and investors
are most active on high volume days. (The assumption is that retail traders tend to be more
reactive to whipsaw movements in the market than larger investors.)

The idea behind the indicator is that value follows volume, a widely held belief among many technical analysts.
For example, if a market is in a downtrend (i.e., selling outweighs buying), it will take
a large influx of buy orders to offset the selling in order to move the market back in the
other direction. At first, a lot of these transactions will simply cancel each other out.
Price may consolidate and not move appreciably in either direction even though volume is building.
Once enough buy orders are in place to outweigh the selling (in terms of how much money is on each side),
only then will the price reverse and go back up.

Institutional traders may be more likely to buy when the volume is low in a flat or declining market.
Volume builds and once the consumers begin outbidding the sellers, the value can eventually follow. As price rises,
retail traders are likely to start buying believing its new uptrend suggests that it might be a good investment
(rather than the fact that it’s typically getting more expensive). At this point,
institutional traders may begin selling to lock in profits

Trading On Balance Volume

Many traders who use OBV will be less interested in its value but rather its rate of change to
help generate trade ideas. If the OBV is moving notably in one direction, it could give credence
to the idea that a big move could be coming in that direction in price.

For example, in the chart below (a daily chart of the S&P 500), OBV moves down faster than the correspondent
move in price. This could tell a trader that a bigger move down in price could be forthcoming. The areas are marked below

 

Trading On Balance Volume

For traders who want to stay with the trend, one could use the OBV in conjunction with a trend following system.
For matters of simplicity, I’ve added just a 50-period simple moving average to the price chart. This will
provide a basic trend indicator. If the moving average is sloped upward, the price will be considered in an uptrend
and those trading with the trend will be biased toward long trades. Likewise, if the moving average is sloped
downward, the price will be considered in a downtrend and may bias one’s trades in favor of short selling.

In the example below, we see a market in an uptrend as identified by the 50-period simple moving average.
On the OBV chart below, we have a tendency to see a notable move up, on the far side the speed at that worth is rising

 

OBV chart below

With the uptrend and rising volume combined with a muted reaction in price,
a trader might look further into pursuing this opportunity.
Below I’ve identified other OBV breakout opportunities in the direction of
the ongoing trend that a trader following this type of system might wish to consider

 

Conclusion
Conclusion

On balance, the volume is used to determine when the “smart” money and “not-so-smart” money may
be most active. Many traders believe that price follows volume.
Therefore, if the volume or a volume proxy indicator is increasing while the response in price
is more muted, some traders may take notice of this divergence as a clue that price may
soon follow. Similarly, when the price is moving but the volume is low, traders may take this as
an indication that the market may be ready to consolidate.

OBV capitalizes on this idea by keeping a running tally of volume when price moves up or down.
On up days, volume (e.g., share count) is further to the indicator. On down days, the volume is ablated from the indicator.

OBV can be used in any kind of system – trend-following/momentum or price reversal.
Traders UN agency ar trend followers might use the OBV’s signals in conjunction with
indicators that facilitate establish the trend. Likewise, those who prefer to identify potential
turning points in the market might combine the OBV with price reversal indicators

certain types of oscillators, moving average crossover strategies).

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