The King's Trader Education

The Trading Plan
The Simpleton's Fibonacci
Fibonacci 101
Fibonacci 102
Fibonacci 103
Practiical Candlestick - Basic Patterns
Steve Nison - Interview with Father of Candlesticks
Steve Nison - Favorite Candlestick Signal
Practical Candlestick - Seedwaves
Practical Candlestick - OBV
Practical Candlestick - Harami
Pivot Points
Basics of Bollinger Bands
Distribution/Accumulation Zones
Donchian Channels
Elliott Waves
Market Structures
Multiple Moving Averages - "The Rope"
Three Price Break
Elements of Gann Angles
Gann Percentage Pivots
Gann on 1929
Options - Basics
Options - Indexes and ETFs
Options - Greek
Options - Covered Calls
Options - Spreads
Options - Straddle
Options - Strangle
Options - Calendar Spreads & Options Repair Strategy
Sector Trading
Swing Trading
Position Trading
TICK & TRIN Tutorial
TICK & TRIN - Sustained Reversal

Trader Training - Free Educational Trading Articles:

Practical Candlestick - OBV

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We have looked at various candlestick patterns for reversals and early warning signals in previous issues. What I would like to do for this issue is talk about adding an oscillator to blend and confirm what the candles are showing us. There are a baker’s dozen to choose from: RSI, ADX, Stochastics, Williams %R, MACD, and so on.

For this article, I would like to look at OBV or “On Balance Volume.”

This oscillator was developed by Joe Granville and introduced in his book New Strategy of Daily Stock Market Timing form Maximum Profits.

The suggestion indicated by OBV is that the changes in the oscillator will precede changes in price, which is not unlike Money Stream in that sense. It is assumed that when institutions are moving into a stock, or out of one, their activity will be reflected by the On Balance Volume.

On Balance volume is cumulative volume. And it’s calculated like this:

Add the day's volume to a cumulative total, when the security's price closes up, and subtract the day's volume, when the security's price closes down.
• If today's close is greater than yesterday's close, then:

• If today's close is less than yesterday's close, then:

• If today's close is equal to yesterday's close, then:

What OBV is also showing in a sense, is patterns of accumulation and distribution. If OBV is traveling for the most part sideways near high prices, distribution is occurring. Sideways at lows in price reflects accumulation. In a ranging market, watch for swings in the OBV oscillator to develop. A rising OBV indicates an upward break out coming. Falling OBV indicates some possible accelerated selling. In a trending market, OBV is more or less confirming what price is already showing you. Confirming bullishness and confirming bearishness. Watch for divergence to present itself between the OBV and price. A bullish divergence pattern should give you a heads up on potential bottoms. Bearish divergence can help to signal your exit near tops.

OBV should never be used as a sole indicator. It blends well with candlestick patterns so let’s take a look at some quick examples.

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"It takes a man a long time to learn all the lessons of all of his mistakes. They say there are two sides to everything. But there is only one side to the stock market; and it is not the bull side or the bear side, but the right side. It took me longer to get that general principle fixed firmly in my mind than it did most of the more technical phases of the game of stock speculation" ----from REMINISCENCES OF A STOCK OPERATOR