The On Balance Volume (OBV) indicator was developed by Joe Granville, and detailed in his 1963 classic, Granville's New Key to Stock Market Profits. The OBV is a momentum indicator, which attempts to display the relationship between volume and price change. The OBV is calculated by adding the day's volume to a running cumulative total when the security's price closes up, and subtracts the volume when it closes down. The On Balance Volume indicator is believed to be able to display if the "smart money" is involved in a price move. Unlike other technical indicators that have oversold and overbought conditions, the OBV is truly a subjective indicator. You as the trader have to be able to look at the price chart and determine if the OBV is confirming or contradicting the price move.
Using On Balance Volume to confirm a breakout
If you are in a stock and it is trending in a direction, you will want to see the OBV trending in the same manner. This confirmation between the price move and volume, implies that there is strength in the move. You will always need to make sure you receive confirmation with an OBV breakout, because if the volume does not follow the move, you can be caught in trap. Traps often produce sharp quick counter moves, at key price pivots. Remember, the higher the volume, the greater the odds that the move has legs. Over time you will see that your win percentage will increase as you use the OBV to follow the smart money.
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