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What is a balanced transaction volume index?How to use the OBV indicator?

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Balanced trading index, English is On-Balance Volumen, referred to as OBV, is a technical indicator based on the transaction volume.It predicts the future trend of the stock price by combining the price trend and the change of transaction volume.As the core of analysis, the relationship provides important clues to market emotions and momentum.

The balance transaction volume index was invented by Joe Granville in the 1960s and was widely used in the stock market analysis.It was used to capture price trends and market emotional changes.

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What is a balanced transaction volume index?How to calculate?

Balanced transaction volume index is used for it technical analysis The tools of tools are predicted by the combination of price and transaction volume information.

Its core principle is Connect the change in transaction volume with the price trend, To provide important clues to market momentum.

The calculation method of OBV is to add the transaction volume to the cumulative total amount during the rising price, and the amount of the day transaction volume is reduced from the cumulative total amount during the decline in price.

The calculation steps are as follows:

  • Select the starting point: Select the starting date and start value of the starting OBV, including the closing price and its transaction volume.
  • Calculate Daily OBV The
    • When the closing price was higher than the closing price the day before, the transaction volume was added to the OBV value the day before.
    • When the closing price was lower than the closing price the day before, the transaction volume of the day from the OBV value the day before.
    • If the closing price of the day is the same as the previous day, the OBV value remains unchanged.
  • Continuous calculation: Repeat this process, adjust the OBV value according to price changes and trading volume every day.

The core concept of OBV is that the change of the transaction volume can indicate the change of price trends.By analyzing the trend and charts of OBV, traders can judge market sentiment and potential price movements.

Take a specific example.

Assuming that a stock’s closed price and trading volume is as follows: as follows:

  • Day 1: The closing price is $ 10, and the transaction volume is 1,000 shares.Assuming that the initial OBV is 0, then OBV = 0 (start value)
  • Day: The closing price is $ 11 (higher than the first day), and the transaction volume is 1,200 shares.OBV = 0 + 1,200 = 1,200
  • Day 3: The closing price is $ 10.5 (below the second day), and the transaction volume is 800 shares.OBV = 1,200 – 800 = 400

In this example, when the stock price rises (from the first day to the second day), OBV increases the turnover of the day (1,200 shares).When the stock price fell (from the next day to the third day), OBV minus the turnover of the day (800 shares).

From this example, it can be seen that OBV is calculated based on the closing price of the day before the day before yesterday, and the corresponding transaction volume is calculated, reflecting the impact of changes in the stock price on the transaction volume.

How to use a balanced transaction volume index?

The value of the balance transaction volume index is not important, and its change trend is the object you need to pay attention to.

1.Identification trend intensity

OBV lines are steadily rising or decreased, which usually represents a strong market trend.

  • OBV is on the upward trend, indicating that more investors are buying;
  • OBV is in a downward trend, indicating that more investors are selling.

2.Analyze the trend of stock prices

By observing the trend of OBV, the reliability of price trends can be evaluated.

When OBV and the stock price rose at the same time, this means that the upward trend is not just a change in price, but the support of the transaction volume, which increases the possibility of the trend.

On the contrary, if the stock price rises but OBV has not increased simultaneously, or the stock price has fallen and OBV has not fell simultaneously, which may indicate that the trend has not received widespread market support, so the trend may weaken or reverse.

3.Identification Reverse point

When OBV is inconsistent with the trend of the stock price (called departure), if the stock price continues to rise and OBV begins to decline, it may indicate that the trend will be about to reverse.

What are the limitations of balance transaction volume indicators?

Although the OBV indicator can display the relationship between the volume and the price trend, it cannot independently predict the price direction and needs to be used in combination with other technical indicators.

At the same time, OBV is a cumulative data based on trading volume, and there is a lag.

Therefore, the balance transaction volume index needs to be with other technical indicators, such as the combination of mobile average, MACD, relatively strong and weak indicators, and considering fundamentals and macro data, in order to do a relatively objective understanding of the market.

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