Posting on Lesson 1 Part 2.
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Well, as explained previously on Lesson 1, Volume is one of the most important parameters in stock trading as it can influence the price movement whether it will be uptrend or downtrend.
So, now here we are. On Balance Volume or in short, OBV.
What is OBV? OBV detects the changes and momentum of volumes which precedes on price changes. A rising volume can indicate someone is interested in playing a particular stock and where public getting interested to get into this stock.
Like other indicators, the OBV indicator will form a direction whether it is an uptrend or downtrend. A rising OBV line indicates that the volume is heavier when the stock price is likewise rising, then the OBV can serve as a confirmation of the price uptrend. With that, stock price rising indicates increased demand for the stock , which is the direction of a healthy uptrend.
However, if prices are moving higher while the volume line is dropping that would mean that a negative confirmation is present. This confirmation will shown that the uptrend is not healthy and should be taken as precaution or warning that the uptrend will not persist. This is how we detect the movement of uptrend and downtrend based on the OBV line indicator.
The numerical value of OBV is not the key factor to decide the move, but on the other hand, the direction of the line is the one that will determine the whole thing. We should concetrate on the OBV line direction and the relationship with the price of the stock instead.
This is also to compare volume changes to the price activity and to confirm on the demand and supply of the stocks.The important of OBV analysis is that we can know volume changes occur before any price confirmation for a particular stock. It is said so because of market direction reflected in volume first, not price.
The simple logic is BBs (institutions, funds, etc.) flows into a stock with a rising OBV before the stock price rises. When the rest of us then only got into the stock, its price and the OBV will rise in tandem. "Smart money" someone from BBs, needs a buy from and sell to in order to make its profits. That someone is rather the retails investors.
This is it. All on theory but not pratical. I hope to show you the live example on of the SGX Stock soon on our next lesson but we will get into depth on your understanding on this before doing a live example.
Till now,
Star-Trader
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