Joe Granville, has developed an indicator that relates volume to price variation, positive or negative, the On-Balance Volume (OBV). It is used in Technical Analysis to measure the flow of volumes, in the graph its line is visible together with the price line, in practice, when the closure exceeds the opening the OBV sum the volumes, and subtracts them when on the contrary, the closure is less than the opening.
Stock market volumes are the transactions of purchase or sale of a security in a unit of time, if referred to a financial instrument, they represent the number of prices traded. The importance of understanding the volume mechanism is crucial to identify where traders are interested and where there is more or less movement and dynamism of trading based on supply and demand.
Through the volumes that refer to the price, the next price movements can be predicted in advance. If prices rise, you will have an increase in volumes. If you notice that there are differences between volume and price, this may change in the future. Knowing how to interpret stock exchange volumes, in the graph, is useful to perform a reliable technical analysis of the volumes of prices during breakouts.
The On Balance Volume is a cumulative indicator that increases or decreases its value based on a bearish bullish sign of the day. The value of increase or decrease is equal to the quantity of volumes that are totally attributed in purchase or sale according to the sign of the session. The calculation formula (also usable through an excel) in case of bullish day (current closing greater than the previous one) is:
OBV = OBV(previous) + Volume
While, in the case of bearish day (current closing less than the previous), The calculation is:
OBV = OBV(previous) - Volume
In practice: On a negative day, the entire volume is subtracted and the indicator goes down; on a positive day, the entire volume is added up and the indicator goes up.
On balance volume relates volumes to the movement of prices, since a solid rise must be accompanied by good volumes, generally instead, at the end of a bullish trend Volumes are missing and prices rise due to lack of sellers.
A complete allocation of all volumes according to the sign of closure, without a careful evaluation of the extent of the difference in the prices of closures and without taking into account the battle that took place during the session is a simplification a little too bold.
The on-Balance Volume indicator is able, as others that have already been examined, to highlight differences that could be signs of a reversal of the trend. The indications that can be provided by Obwalden are:
Divergences between indicator and prices as mentioned above, anticipate trend changes, increase or decrease in volumes anticipates the price movement. The divergence may be bullish when On Balance Volume rises as prices fall. Downward divergence when indicator decreases and prices rise.
It should be noted that the On-Balance Volume indicator is not suitable for applying futures to the market, since for these instruments there is a sale on the opposite side of each purchase; therefore, there is no reason to allocate the volume of purchases or sales according to the sign of the session.
The indicator of Joe Granville, presents some critical issues, the real trend of prices and the trend of purchases and sales are not represented in a faithful way, it follows that, to calculate On Balance Volume you have to look at both the current closing and the previous one. For this reason, the use of other indicators that follow the same calculation principle but manage to eliminate critical issues and negative effects is recommended.
If the day is bullish (if the current closing is greater than the previous closing), the OBV calculation formula is as follows:
OBV = OBV (previous) + Volume
If the day is bearish (if the current closing is less than the previous closing), the OBV calculation formula is as follows:
OBV = OBV (previous) - Volume
On Balance Volume is the relationship between volumes traded during stock exchange sessions and price movements. According to the basic principles of technical analysis, a solid rise must be accompanied by increasing volumes.
The following trading signals are obtained in the constructive scheme of the On-Balance Volume according to the price trend:
OBV provides the following information:
The volumes represent the total of market trades between investors in securities or cross currency over a given period of time. They allow you to understand the movement of prices by analyzing the graph.
Price movements and volumes are closely related because the growth or the decrease in trade defines the market trend, in growth phases trade will increase, in decrease phases trade will decrease.
Volumes are the confirmation of price movements, and the amount of investor participation. In practice, volumes fuel the rise in prices, while growth is accompanying the movement. The volumes accompany follow in parallel the bullish phases of the titles. On the graph, volumes are visible in the form of histograms (vertical bars) that are located below the price zone.
Volumes usually represent the confirmation of the price trend, so OBV as an indicator is useful to confirm the trend in progress, it is important to identify the direction of its line. The Granville indicator is applicable for daily, weekly and monthly analyses.
Unlike other indicators that are based solely on price, the Granville indicator is based on volumes and their weight in a price dynamic. Trading volumes highlight the future price trend. By analyzing them on the platform chart, you can understand the market direction in advance, as traditional investors enter and exit the market earlier than small investors.
Granville's technical analysis indicator, while very good, is best used to trade by consulting other indicators that confirm its forecasts. On Balance Volume as an indicator cannot be applied to the futures market.
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It is much easier to analyze some data through the reading of graphs than the discussion that can arise around simple numerical inputs. Through the graphs it will be possible to monitor information related to volumes and other technical indicators (they are displayed at the base of the graph characterizing the time axis). To give a concrete example, the bands of Bollinger are directly represented on the price graph.
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