What You Should Know about On Balance Volume and Penny Stocks - dummies

What You Should Know about On Balance Volume and Penny Stocks

By Peter Leeds

On balance volume (OBV) is an indicator illustrating the flow of money into and out of a penny stock. OBV can be very useful when predicting future prices of penny stocks, especially because lower-priced shares are generally more sensitive to even small amounts of buying and selling.

The OBV value is derived by keeping a running total of shares traded. Each day in which the shares close higher, all of that day’s trading volume is added to the running total. Each day in which the shares trade lower is subtracted from the running total.

The OBV displays as a line, and starts at a value of zero. It rises and falls over the period of time you select for your trading chart. The day’s total trading volume either adds to (on days when the shares closed higher), or subtracts from (on days when the shares closed lower) the OBV value.

The farther into positive territory the OBV line rises, the more money is moving into that penny stock. When the OBV line is in the negative, it illustrates money flowing out of the penny stock.

You can see an OBV line by using any technical analysis (TA) charting website. It usually displays across the bottom of the chart near the trading volume indicators.

Here are several important OBV considerations:

  • Time frame: OBV displays for the time period of your trading chart. A two-month chart shows OBV for that two-month period, while a three-year chart displays OBV for a three-year period.

    When you switch between various periods of time, you see different OBV values; when you compare those values, you can get important clues. For example, if OBV shows positive 45,000 for a two-month period but negative 2.5 million for a three-year period, you can surmise that there has been a recent increase in buying, whereas most investors have been selling over the last several years.

  • Correlation with OBV and share price activity: Because OBV is a measure of buying or selling, and shares are priced based on those trades, you often see a close correlation between OBV and share price. As OBV rises, shares are likely to rise. Therefore, if OBV is trending up or down but share prices haven’t yet followed suit, you can usually expect that they will in the near future.

  • Slope strength: When OBV is rising or falling very sharply, the activity indicates that money is flowing in or out of the stock very strongly. The steeper the slope, the greater the relative number of shares of that stock being bought or sold.

  • Slope magnitude: A slight positive or negative OBV value isn’t significant in terms of TA clues, but a more substantial value can be quite useful. For example, OBV of 2,000 implies that only 2,000 more shares were traded on up days than down days during the entire time period. On the other hand, an OBV value of 65 million for that same stock could provide helpful trading clues.

  • Mid-chart trends. The most important OBV analysis clue isn’t necessarily its final value but rather the strong and significant up- and downtrends that occurred at various times during the trading chart’s time period. For example, if a one-year chart shows a massive OBV drop-off halfway through the year, you can assume that shareholders were unloading their positions at that time.