stock market terms definitions

By Jeff West On June 8, 2010 Under Stock Market

Having a stable of business tools to help you time when to buy stocks dramatically improve business profits. However, many traders especially novice trader, suffer from paralysis by analysis. There are simply too much data, too many strategies and too many for any tradesman fully master.

Implement a focused momentum indicators on the volume provides several key advantages, not least of which is the simplicity of reading. Momentum indicators tend to be very simple to interpret, and can provide important insight into the trends of the market traders,

On Balance Volume (OBV)

The volume balance is a momentum indicator that was created by Joe Granville in 1963. The on balance volume indicator is designed to measure the positive volume flow. The key concept to understand is that volume precedes price, and as such, which measures the volume flow (in or out of a population) It offers merchants a leading indicator of market trends.

The volume balance is perhaps the simplest of all volume-based indicators motion. Simply add the volume periods for a total operating when the population of the closed, and subtract the volume when closed. Next, the operator compares the OBV pending against the board of underlying asset prices to search for divergences or confirmation.

The definition of divergence provided by StockCharts.com

"A situation that occurs when two lines in a successful move in opposite directions vertically. People often look for discrepancies by comparing the direction of action at the direction of its RSI, its MACD or Stochastic Oscillator. There are two types differences, positive and negative. A positive divergence occurs when the indicator moves higher while the population is declining. A negative difference occurs when the indicator moves lower while the population is increasing. "

With regard to volume balance, a divergence shows that the volume is not supporting the current trend and momentum is fading. If a trader looking to buy a stock, and saw a negative difference in the whole volume indicator, the operator does not want to buy that stock for stock.

Strengths and Weaknesses of On Balance Volume

The Balance Volume of the main strengths are the simplicity of the gauge reading and the ability to identify trends of weakening. However, OBV has some weaknesses that retailers must take into account:

1. OBV requires a volume of complete periods. In other words, the indicator may not include the current day (Or any period of table used by the merchant) data to construct the indicator until the end of that period.
2. Since OBV includes the volume directly in the formula, not gracefully handle gaps

The number 2 is a significant weakness in OBV, as gaps may represent a significant event in the fundamental data and news, as the release of earnings.

To compensate for this weakness, a very prominent businessman named Tom created a derivative Bierovic On He called Balance Volume Balance True Range.

On Balance True Range (OBTR)

Before discussing the implementation of OBTR, it is important understand that there is a statistically significant relationship between volume and price movement of a stock. The statistical analysis of this relationship has been well documented as in the MIT Laboratory for Information and Decision Systems of this report: relationship between trading volume and security prices and returns.

True Range

The first component of the momentum indicator OBTR called True Range. True Range. True Range, as defined by J. Welles Wilder is:

True Range (TR) is the highest of the following:

• by day Today's high today less than low
• The absolute value less than yesterday's closing high today.
• The absolute value of less than today under the previous close.

If you are using a daily chart today's replacement for the term you are using. If the current difference between the current period high vs low current period is likely to be used as the True Range. On the contrary, if the difference is small, True Range would be composed with a the other two methods. Normally, this only occurs when a gap in the price shown in the chart.

As you can see, the true size is a measure the movement of prices and, as noted earlier, is closely related to the volume. Mr. Bierovic simply replaced the component volume OBV with True Range, to create On Balance True Range.

OBTR addresses two weaknesses in OBV. First, OBTR always up to date, and secondly, the gaps are handled properly in this indicator.

OBTR be combined with a 9 day moving average (EMA) to create, buy and sell signals. A bullish signal occurs when crossing OBTR above the EMA and a bearish signal is generated when OBTR crosses below the EMA.

The combination of OBTR with MACD

The combination of a dual system OBTR MACD can be a very powerful set of indicators for determining the entry price (when to buy stocks) and outputs (when sell shares).

A MACD 12,26,9 is combined with signals OBTR purchase. Look for bullish divergence between price and OBTR, cross overs and optimistic OBTR both the MACD and entry points.

MACD 19,39,9 A combined with OBTR for sell signals. Wait for the MACD to show a bearish cross, or crossing under line 0, and confirm the bearish divergence signal using OBTR or crosses.

Want to see examples of how to buy stock using momentum indicators? In this article I show you exactly how to use the OBTR / MACD system, and an even more powerful indicator system you’ll have to see to believe. Take a moment to improve your trading results, and check out these powerful indicators now!

To Profitable Trades,

Steve Warshaw
Income Trader

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