How does a trader choose which stocks to buy out of the thousands that are available on the stock exchange? I'm not talking about the "fundamental approach," in which a trader looks at the company's "fundamentals" and researches its performance results, price-earnings ratios, balance sheets, turnover, and dividend yield.
Most successful traders who trade stocks for a living seem to use the technical analysis method.
This is done with the help of charts and technical indicators that are put on the stocks. They will come up with filters or explorations to look for stocks that meet certain criteria that show the stocks are about to move or have already started to move.
Professional traders who trade for a living have a lot of tools to help them, but the On Balance Volume indicator is one of the most useful tools they use most often.
On Balance Volume, or OBV for short, was made popular by Joseph Granville. OBV stands for cumulative volume, and the idea behind it is that similar OBV should support similar prices. By using this indicator, short-term traders will be able to tell when this setting is different or when the OBV has already broken out but the price hasn't caught up yet, indicating that a price jump is about to happen.
But how big is the jump that's coming? If there is an OBV outbreak, which means that the price should follow in the next few trading sessions, one must also make sure that the price jump will be big enough to give him a good enough profit margin to trade.
Traders add another trading rule to this trading indicator to make sure they catch the big moves. Elliot wave theory tells us that any stock's 3 and 5 waves are the strongest and most impulsive waves up.
I've seen traders do well when they look for stocks that have an OBV outbreak and are in their impulsive 3th and 5th waves, which are their longest and strongest.
With this knowledge, if you find a stock that has just had an OBV Outbreak up and is moving in its 3rd or 5th wave, you have a great candidate that will probably run away in price, giving you a big profit in a short amount of time.
