15. On-Balance Volume (OBV)
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.
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.
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.
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.
5. How is OBV calculated or derived?
Initialize OBV with a base value (e.g., 0).
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.
Plot the cumulative OBV line over time.
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.
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.
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.
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.
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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