Joe Granville

Joe Granville

Joseph Granville (1923 – 2013) was an American financial analyst and author, best known for his pioneering work in technical analysis and particularly for his focus on volume analysis and the development of the On Balance Volume (OBV) indicator. While his methods were sometimes controversial, Granville profoundly influenced generations of traders and analysts, particularly in the realm of futures trading and stock market analysis.

Early Life and Career

Born in 1923, Granville began his career in the stock market in the 1930s, gaining experience during a volatile period. He served in the military during World War II and afterwards returned to the financial markets. Unlike many of his contemporaries who focused on fundamental analysis, Granville believed that market prices accurately reflected all known information and that studying price and volume alone could reveal future price movements. He initially struggled to gain acceptance for his ideas, as chart analysis was not widely respected at the time.

Key Concepts and Contributions

Granville’s approach was characterized by a rigid adherence to objective, quantifiable data. He rejected subjective interpretations and emphasized the importance of confirming signals. Several key concepts defined his trading philosophy:

• Price Action is Paramount: Granville believed that price is the ultimate arbiter of market sentiment. He stated that price discounts everything.
• Volume Confirms Price: This is arguably his most famous contribution. Granville argued that price movements should be confirmed by volume. A price increase accompanied by high volume is more reliable than one occurring on low volume. Conversely, a price decline with high volume is a stronger signal than a decline on low volume. This principle is central to confirmation bias avoidance.
• Key Reversal Days: Granville identified specific types of days as particularly significant. These “key reversal days” involved a substantial price range and a closing price near the extreme of that range, accompanied by heavy volume. These are precursors to potential trend reversals.
• Support and Resistance: Like many technical traders, Granville recognized the importance of support levels and resistance levels. However, he stressed the need for confirmation from volume when these levels were tested.
• The Granville Bands: These bands, related to Bollinger Bands, are plotted around a moving average to identify potential overbought and oversold conditions.

On Balance Volume (OBV)

Granville’s most enduring contribution is the On Balance Volume (OBV) indicator. Introduced in his 1963 book, *Granville's New Key to Stock Market Profits*, OBV is a cumulative volume indicator that attempts to relate price changes to volume.

The calculation is as follows:

• If the closing price is higher than the previous day's closing price, the volume is added to the OBV.
• If the closing price is lower than the previous day's closing price, the volume is subtracted from the OBV.
• If the closing price is the same as the previous day's closing price, the OBV remains unchanged.

Granville argued that OBV would lead price. Divergences between OBV and price were particularly important. For example, if price is making new highs but OBV is not, it could signal a weakening uptrend and a potential bearish reversal. Similarly, if price is making new lows but OBV is rising, it could indicate a strengthening bullish trend and a potential bullish reversal. Understanding market momentum is key to interpreting OBV.

Granville’s Trading Rules

Granville wasn’t just a theorist; he developed a specific set of trading rules. These included:

• Never Trade Against the Trend: He emphasized identifying the prevailing market trend and trading in alignment with it. This aligns with the principle of trend following.
• Confirm Signals with Volume: As discussed previously, volume confirmation was paramount.
• Use Stop-Loss Orders: Granville advocated for strict risk management using stop-loss orders to limit potential losses. Understanding position sizing is crucial here.
• Patience and Discipline: Granville stressed the importance of waiting for high-probability setups and avoiding impulsive trades. Utilizing a trading plan is essential.

Criticisms and Legacy

Granville's methods were not without criticism. Some analysts found his rules to be too rigid and inflexible, and argued that they didn't adapt well to changing market conditions. His emphasis on short-term trading also meant that his techniques could generate frequent trading signals, potentially leading to higher transaction costs.

Despite these criticisms, Granville’s influence on technical analysis remains significant. His emphasis on volume analysis and objective trading rules continues to resonate with traders today. Many modern technical indicators and trading strategies build upon the foundations laid by Granville. His work contributed to the growing acceptance of quantitative analysis in financial markets. His concepts are still taught in many trading courses and are incorporated into various algorithmic trading systems. He also contributed to understanding candlestick patterns.

Further Learning

• *Granville's New Key to Stock Market Profits* by Joseph Granville (1963)
• Studying Elliott Wave Theory can complement Granville’s work.
• Researching Fibonacci retracements provides further tools for identifying support and resistance.
• Understanding moving averages is crucial for applying Granville’s concepts.
• Exploring chart patterns can enhance your trading strategy.
• Mastering risk-reward ratio calculations is vital for successful trading.

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