15. On-Balance Volume (OBV)

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1. What is On-Balance Volume (OBV)?

OBV is a cumulative volume-based indicator that relates volume flow to price movement. It helps traders determine whether volume is confirming a trend by adding volume on up days and subtracting it on down days. It’s widely used to detect buying/selling pressure and potential trend reversals.

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2. Components of OBV?

• Volume: Daily trading volume.

• Price Direction:

  • If close > previous close → Add volume to OBV.

  • If close < previous close → Subtract volume from OBV.

  • If close = previous close → OBV remains unchanged.

• OBV Line: Cumulative sum of volume changes based on price direction.

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3. Pros and Cons of OBV?

Pros:

• Easy to compute and interpret.

• Highlights volume-price divergence.

• Useful in confirming breakouts and breakdowns.

Cons:

• Sensitive to price noise — false signals in choppy markets.

• Doesn’t reflect the magnitude of price changes.

• Less effective in low-volume or illiquid stocks.

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4. What is the purpose of OBV in stock analysis?

• To identify whether volume supports price movements.

• To detect divergence between OBV and price (signal of reversal).

• To confirm trend continuation or spot early accumulation/distribution.

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5. How is OBV calculated or derived?

1. Initialize OBV with a base value (e.g., 0).

2. For each period:

   • If price closes higher, OBV = previous OBV + current volume.

   • If price closes lower, OBV = previous OBV − current volume.

   • If unchanged, OBV remains the same.

3. Plot the cumulative OBV line over time.

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6. When should traders use OBV?

• To confirm breakout/breakdown strength.

• When watching for hidden accumulation or distribution.

• As a divergence tool to forecast potential reversals.

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7. What are the limitations or risks of using OBV?

• Doesn’t account for price change magnitude.

• Can be distorted by volume spikes not tied to true buying/selling pressure.

• Less reliable in sideways markets.

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8. What are common mistakes when interpreting OBV?

• Ignoring divergence warning signs between OBV and price.

• Using OBV without trend or pattern context.

• Over-trusting OBV in illiquid assets or news-driven moves.

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9. How can OBV be combined with other tools for better accuracy?

• Combine with RSI or MACD for confirmation of momentum.

• Use with trendlines or support/resistance levels.

• Pair with candlestick or breakout patterns for precise entry timing.

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10. How do professional traders interpret OBV differently from beginners?

Professionals:

• Use OBV to track smart money accumulation/distribution.

• Watch for OBV divergence as an early signal of trend reversal.

• Integrate OBV across multiple timeframes with volume-based filters.

Beginners:

• Often follow OBV direction blindly, without price confirmation.

• Don’t distinguish valid vs. false breakouts using OBV.

• Rarely adjust strategy for asset-specific volume characteristics.

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