On balance Volume – Consider the Vital Points
Successfully developed by Joseph Granville in 1963, an On Balance Volume is a technical indicator and measures the changes in volume. The tool is based upon Granville’s idea that when the volume changes sharply without any major price changes in the issue, then the price is expected to spring up or down soon. The theory proposes that the volumes precede the prices. And upon this assumption is the on balance volume formulated to predict any changes in the market.
To read and interpret the curve given by the on balance volume is no rocket science. If you know the very basics, you will do just fine.
• The slope given by the on balance volume helps the traders and the investors to judge the market trends.
• A slope going up reflects an increasing trend, and likewise a declining slope represents a downward trend.
• If otherwise the trend is upward and the on balance volume gives you a negatively headed slope, it is a major indication that the trends will soon shift and the smartness would be out of the picture.
The on balance volume helps you measure the selling pressure and the buying pressure. This indication can be read simply; just keep in mind this rule of thumb:
• When the positive volume is greater than the negative volume, buying pressure is being indicated. In this case the on balance volume line would rise.
• If the negative volume is greater than the positive volume, selling pressure is high. The on balance lien would decline as an indication.
Divergences in a trend are indicated to be bullish or bearish. With the on balance volume, you can read the pattern and figure out if there is a divergence in the trend and what type is it.
• Bullish: When the on balance volume forms a higher low, despite the lower low of the prices, there is a divergence termed as bullish.
• Bearish: On the contrary, if the prices make a higher low and at the same time you see the on balance volume indicatinga lower low, you have a bearish divergence.
Form the above information it is clear that the on balance volume is a simple indicator. It helps you figure out the price trends in the market and judge the selling pressure and the buying pressure. All this and other information does provided by the tool helps you decide whether or not to invest, sell, or make purchases.
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