Understanding Stocks

134 UNDERSTANDING STOCKS
On-Balance Volume (OBV): A Measure of Volume
On-balance volume (OBV) is one of the most underutilized but important
indicators. OBV measures volume, which, as you remember, is the
force that makes stocks go up or down. When you put OBV on a chart,
a volume line appears at the bottom of the chart on top of the volume
bars. OBV basically measures how much money is flowing into or out
of a security.
If the OBV line is dropping, it tells you that people are selling. If
the OBV line is rising, it tells you that people are buying. After all, no
matter what is happening in the market, if people are pulling money out
of a stock, its price will go down. Conversely, if people are buying a
stock, its price will go up. Figure 12-2 gives an example of OBV.
Because technical analysis is not an exact science, many traders
use OBV to confirm what is happening with a stock. For example, let’s
say that a stock is up by 3 points but the OBV is dropping. This tells you
that although the stock is temporarily going up, it’s not going to last.
CAT Daily
On Balance Volume
8 11 12 13 14 15 18 19 20 21 22 25 26 27 29 Dec 3 4 5 6
Figure 12.2 On-balance volume
©Big Charts.com
12/06/02
50
49
48
47
46
45
44
43
42
41
20
10
0
–10
–20
Millions