What is On-Balance Volume ?
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On-balance volume (OBV) is a technical trading momentum indicator that uses volume flow to predict changes in stock price. Joseph Granville first developed the OBV metric in the 1963 book .Granville believed that volume was the key force behind markets and designed OBV to project when major moves in the markets would occur based on volume changes. In his book, he described the predictions generated by OBV as "a spring being wound tightly." He believed that when volume increases sharply without a significant change in the stock's price, the price will eventually jump upward or fall downward.
Definition
On-Balance Volume (OBV) is a technical trading momentum indicator that uses volume flow to predict changes in stock prices. It accumulates daily volume to reflect the buying and selling pressure in the market, helping investors gauge potential changes in price trends.
Origin
OBV was first developed by Joseph Granville in his 1963 book. Granville believed that volume was the key force in the market and designed OBV to predict major market movements based on changes in volume. He described the predictions generated by OBV as "a spring being wound tightly," suggesting that when volume increases sharply without significant price changes, prices will eventually rise or fall.
Categories and Features
OBV is primarily used to identify potential reversal points in price trends. Its features include simplicity and ease of use, as it reflects market sentiment through cumulative volume changes. One advantage of OBV is its ability to identify divergences between price and volume, which often signal price reversals. However, OBV also has limitations, such as potentially misleading signals during sideways market movements.
Case Studies
A typical case is Apple Inc.'s stock movement in 2012. At that time, OBV showed a significant increase in volume while the stock price fluctuated within a narrow range. Subsequently, Apple's stock price surged over the following months, validating OBV's prediction. Another example is Tesla Inc.'s performance in 2020. OBV showed a strong upward trend before Tesla's stock price soared, indicating increased market interest and buying pressure on Tesla.
Common Issues
Investors using OBV may encounter issues such as how to correctly interpret divergences between OBV and price, and how to avoid misjudgments during sideways markets. A common misconception is that changes in OBV always directly lead to price changes, whereas OBV is merely an auxiliary indicator that should be used in conjunction with other analytical tools.
