Using the OBV Signal(n)

DoctorT

Dear Mark D,

One of the uses of the OBV is to confirm bullish breakouts. I want to use the OBV for such purpose. I realize that there are many other, probably better, indicators but, for learning purposes, I wanted to start with the SMA, the slow stochastic, and the OBV. Thus, I am planning to run the following scan:

// Trend
AND [close > SMA(200,close)]
AND [SMA(50,close) > SMA(200,close)]

// Breakout
AND [Yesterday's Daily Slow Stoch %K(14,3) < 20]
AND [Daily Slow Stoch %K(14,3) > 20]

//Confirmation
AND [OBV > yesterday's OBV]

Do I have to add the OBV Signal(n), which as you said is an n-period average of the OBV, to the above scan?

If so, how do I do it?

Thank you!

Doctor T

markd

I think the usual way to use OBV Signal is as a signal - OBV crosses above OBV signal or crosses below.

If you were to use OBV Signal as a filter, for long trades you would probably want to see if it is rising over some period of time, and maybe whether OBV is above it. I think that is how would want to use it.

In your example, OBV is not really a confirmation, since you would need an up close to meet your K condition, and OBV will always rise with an up close.

Apart from your scan, another possibility for OBV itself is to look for divergences - so on the down side, you would check whether the close is say min 21, and then check whether OBV is NOT min 21 - that would suggest that the price move to the downside is not attracting volume, so it may reverse. On the upside you would look for the reverse - max price, not max OBV. But that might not be useful as an options set up because it doesn't guarantee an immediate reversal. But it might be a stock you put on your watch list.

DoctorT

Dear Mark D,

Thank you for your reply. Lots to digest!

My scan was based on the writings of Philip Thygesen of Stock Market Strategy, which stated (1) identify the bullish trend using a lagging indicator such as moving averages, (2) spot a breakout using a leading indicator such as a momentum indicator -the Slow Stochastic or the RSI- and (3) validate the breakout using a confirming indicator -the OBV indicator. Unfortunately, he does not state clearly how to use the OBV.

If you were to use the OBV, or the OVB Signal(n), as confirmation, not as a filter, how would u use it? What settings would you use?

Doctor T

markd

Probably he means the OBV should be in a rising trend, so you might test for OBV > OBV Signal. and OBV Signal rising. In other words, the filter is the confirmation.

I don't use OBV on my charts and I wouldn't know how to use it for options without doing the research. There's really no way around doing the research. The "rules" of technical analysis are not ironclad like the laws of physics. You have to see many (many, many) examples to get a feel for how - or when - they work. You can only try to get probability on your side. You won't find a formula that works 100 % of the time. 60% is good. 70 % is great. 80% is out of this world. In general, lower probability set ups appear often, higher probability set ups less often, and great ones not that much.

DoctorT

Dear Mark D,

Thank you for your reply.

Here's a thought.

To select the stocks, I would run the following scan and save the results as a favorite list:

//Scope
[type = stock]
AND [group is not ETF]
AND [optionable is true]
AND [country is US]
AND [[exchange is NYSE] OR [exchange is NASDAQ]]
AND [[group is SP500] OR [group is SP400] OR [group is SP600]]

// Size
AND [Daily SMA(20,Daily Volume) > 50000]
AND [Daily SMA(20,Daily Close) > 25]

// Trend
AND [Close > SMA(200,Close)]
AND [SMA(50,Close) > SMA(200,Close)]

// Breakout
AND [Yesterday's Daily Slow Stoch %K(14,3) < 20]
AND [Daily Slow Stoch %K(14,3) > 20]

Then, for confirmation, the OBV trend should be slopping down before the breakout and the OBV trend should be slopping up after the breakout.

Thus, three days after running the first scan, I would run the following scan:

//Scope
[favorites list is X]

//Confirmation
AND [3 days ago OBV Signal(7) > 3 days ago OBV]
AND [OBV > 3 days ago OBV]

What do you think?

Doctor T

markd

Well, you could give it a try as is and see what happens.

I haven't read what your guy says, but I think the purpose of OBV is to confirm that OBV and price are both generally rising together over time, not just at the K event. Your scan checks that the long term price MA is rising, so you want OBV to be rising over time as well. So I think you want to use a longer parameter for OBV Signal to see that it is generally rising - in an up trend of some length.