It makes me happy when people are interested in learning new things. Last Friday I received this inquiry from a Bookaka subscriber:
This is for you, @blankcurse.
On OBV (On Balance Volume)
The OBV measures accumulation and distribution using volume and price movements. If the current closing price is higher than the day before, the volume for the day is added to the OBV. If current closing price is lower than the day before, the volume for the day is deducted from the OBV.
Therefore it is assumed that if OBV is trending higher, there is accumulation. If OBV is trending lower, there is distribution.
Volume precedes price. If price is dropping while OBV is rising, then a bullish OBV divergence will be formed.
This means that the cumulative volume on up days are higher than the cumulative volume on down days. There is accumulation during the downtrend and a reversal will likely follow.
This is evident in this chart of PX.
Now take a look at another example. Here is the chart of SCC.
SCC’s OBV made lower highs while price was unchanged (double top) , creating a bearish OBV divergence. This means that the cumulative volume on down days were higher than the cumulative volume on up days, implying distribution. This resulted in the drop in prices.
OBV is not just used to identify reversals using divergences.It is also used to confirm uptrends or downtrends. A rising OBV during an uptrend means a continuation of trend due to accumulation while a falling OBV at a downtrend confirms that there is distribution.
On CCI (Commodity Channel Index)
For many reasons, price tends to move away from its average daily prices from time to time, be it due to negative news that causes markets to sell down, or positive news that causes mass excitement that tends to push prices upwards and away from average daily prices. These average daily prices are represented on the chart by moving averages.
The CCI measures the extent to which prices are detached from its moving average . Extreme cases tell traders that there is an opportunity to buy or sell. When prices are in a range, CCI tends to move within 100 to -100. This reflects ranging prices.
When trading extreme oversold conditions, a trader could buy if CCI is below -200 or lower, and sell when CCI is above 200 or higher. Otherwise, a trader could wait for entry and exit confirmation via bearish and bullish divergences, or if CCI forms lower highs or higher lows , correspondingly.
Take a look at this LC chart below. When CCI is above the 200, price is far above , or severely detached from its moving average (green line). A trader would be waiting for a bearish divergence or lower highs to sell.
When CCI is below -200, price is far below the moving average. A bounce trader will be waiting for higher lows / bullish divergences to enter.
I use CCI during quick plays whether daily or intraday to find opportunities based on extreme market reactions.
IMHO , trading within the 100 to -100 range, will not provide a high risk reward scenario. But that’s just me.