Help with Obv indicator

jospmi

hello everyone I use a momentum indicator called OBV, I know it reflects the movement of positive and negative volume. My question is that I added a 30 day ma to my OBV indicator a while back and I don’t remember why. I may have read about it somewhere on the stock charts website?? Could someone help me understand the benefit of the MA line in the OBV indicator box. Any known strategies using this combo would greatly be appreciated to include the best MA to use for short term holds (2 to 6 weeks). Thank you 

markd

The main use of OBV is to spot divergences between it and price that suggest changes in price direction are due. So, if price makes a new or lower low, but OBV stays higher than its previous low, it suggests selling pressure has decreased so buyers will have an easier time getting price to move up. However, it really signals more that you should consider changing your bias from bearish to bullish rather than an immediate entry signal as reversals can take time to work themselves out.

Note that price can change direction without a divergence in OBV. Divergences occur when large players want to disguise their operations, e.g., they want to accumulate or distribute very large positions without affecting the price too much. But some stocks are too large for even big players to manipulate and some are too small or uninteresting to attract their attention. Prices in those stocks still change direction depending on the market and company fundamentals, but OBV doesn't give you a heads up.

The purpose of a moving average is to estimate the strength of a trend. If price (or OBV) is making lows above a rising moving average, the trend probably has a way to go. If the lows get close to the moving average, price (or OBV) should bounce off it if the trend still has life. If it breaks the MA significantly, or stays around it for a while, it's probably a hint to lighten up if you have a position, or look elsewhere if you don't. So, with a stock, you would probably want to compare how OBV is doing vs its MA and how the stock price is doing vs. its MA. If OBV is having trouble staying above its MA, price will probably eventually follow. But again, it probably suggests a change of bias rather than immediate action. MA crossovers can also signal a change in bias - if OBV has been under its falling MA, then crosses above it, it signals unusual buyer strength, which might be an early warning of a change in trend. If it stays there (makes lows above the MA), then a change in trend is much more likely.

Very often, price is affected by many different currents (long term investors, momentum players, swing players, value players, technical players, day traders, option traders, etc.) and it doesn't change direction until the changing strengths of those currents converge in one direction. No one indicator measures all those currents. So, making decisions is a process of weighing the evidence, not relying on one signal in all circumstances.