Monitoring the Smart Money by Using On-Balance Volume
by Wayne A. Thorp, CFA
The study of technical analysis focuses primarily on price and volume. Perhaps it is not surprising that price garners most of the attention. However, volume deserves more than a cursory glance.
Volume is important because it provides information about the strength (or lack thereof) of price movements.
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Heavier volume should be in the direction of the existing trend—volume should be relatively higher on “up” days during an uptrend and on “down” days during a downtrend. Furthermore, price movements on heavier-than-normal volume are more apt to continue than those with light(er) volume.
One of the more useful technical indicators used by technicians is “on-balance volume” (OBV), which was introduced by Joseph Granville in his 1963 book “Granville’s New Key to Stock Market Profits.” OBV takes volume analysis beyond the volume bars typically seen below a price chart and provides a visual representation of the volume flow for a given security, enabling you to compare it against the price action.
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Discussion
With so much off-exchange volume ie dark pools etc. How relevant is ANY volume-based metric anymore when you are failing to capture as much as 80% of volume?
posted 9 months ago by Mark from
IMO, I find two problems with this approach: 1) the reversal of a trend is not known except in retrospective, that is, you don't know when a trend is really changing until after-the-fact, and, 2) when volume increases there is no way of knowing whether the shares are moving from "smart" to "dumb" hands, just that there is increased trading activity. The volume increase on an "up day" may only reflect the increased activity of day traders or momentum investors, jumping in when volume is increasing with price increases. It's as reasonable to say that smart money is unloading as it is to say that they are accumulating, or that large institutional or investment funds are pumping and dumping. And, I agree with Mark's comment above and question the usefulness of these "indicators".
posted 9 months ago by Howard from North Carolina
Do most technical indicators really confirm the past rather than acting as a useful guide to the future?
posted 9 months ago by John from Illinois
