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ON BALANCE VOLUME. Definition. The On Balance Volume indicator was created to track whether or not people’s emotions were consistent with prices. It is a leading indicator, meaning that it leads stock prices higher or lower.
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Definition • The On Balance Volume indicator was created to track whether or not people’s emotions were consistent with prices. • It is a leading indicator, meaning that it leads stock prices higher or lower. • OBV often gives an early warning or buy signal before anyone knows what’s going on.
Calculation of OBV • If a security’s price closed up for the day on 100,000 chares, the OBV is 100,000 for that day. • Likewise, if a security’s close had been negative, the OBV would be –100,000. (No change days are ignored) • OBV results in a picture over a period of time that traces a series of valleys and peaks that often follows the stock’s price.
Key to OBV’s advantage • Key to it’s advantage is when it diverges from prices. • If a stock price falls to a new low and the OBV line doesn’t, the indicator is interpreted as positive (Bullish divergence) • If a stock price rises to a new high and the OBV line doesn’t, the interpretation is negative (Bearish divergence)
