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Strategies & Market Trends : TA Science Projects & Experimental Indicators -- Ignore unavailable to you. Want to Upgrade?

To: ftth who wrote (159)	6/3/1998 9:59:00 PM
From: ftth	Read Replies (2) \| Respond to of 237

[Granville's On-Balance-Volume]: Is defined as: { IF(today's close > yesterday's close), THEN today's OBV=yesterday's OBV+today's total volume IF(today's close<yesterday's close),THEN today's OBV=yesterday's OBV-today's total volume IF(today's close=yesterday's close),THEN today's OBV=yesterday's OBV } Observations: Except in the "no change" case, all the day's volume is either added to, or subtracted from a running total. Intuitively, we know this is false. The entire volume for the day will NEVER be all buys or all sells. So we know from the outset that we are adding biased data to our data set each day. Therefore I do not believe OBV is a good choice as a signal-generating indicator for DAILY trades. The potential benefit of OBV is as a longer-term confirming indicator, and not as an entry signal. Over a longer time frame, these one-sided daily biases will have a canceling or neutralizing effect, such that the trend of OBV is more representative "on balance". As with any indicator, I can find cases where it DOES work for daily trades. That's true for any arbitrary indicator. But, since it doesn't make intuitive sense that the measurement should be accurate as a daily trade signal, I wont use it as such. Another problem with OBV: It is accumulated across the entire displayed chart, so the starting point affects the shape of the curve: A bona-fide breakout with good volume may be so insignificant relative to this large accumulated sum that it's significance isn't noted. If the beginning of a displayed chart has a few days of huge volume, or a few outlier-days in the middle of the chart with huge volume, this can mask a later change in A or D that is more spread out and on lower (but still significant) single-day volume. Another problem with OBV: We base the decision for assigning the volume as either Accumulation or Distribution on the change between yesterday's close and today's close: Say the stock closed on its high yesterday, at 50. Say today it gaps up to open at 55, trades down the entire day and closes on its low at 51. We know the majority of today's trades were sells, but because today's close is higher than yesterday's, all of today's volume is assigned as Accumulation. In summary, we know OBV is biased. It assigns all volume to one state or the other. However, this bias is applied in a consistent manner and the bias is known from the outset. The longer-term trends in OBV are of more value than the individual daily changes. It is not necessary for an indicator to be completely unbiased or completely consistent to be of value. But, we would like the one we use to be less biased than alternatives and more consistent than alternatives. It's not always possible to have both in a single indicator. This is the value of a confirming indicator. This is not the same as just using multiple indicators and thinking that automatically gives a more accurate read. Much the same argument as more stocks does not automatically increase diversification. We have to carefully choose the right tool for the job. NEXT:Chaikin's A/D