Normalizing Unbounded Stock Indicators for Cross-Company Comparison
Summary
The document asks how to compare indicators such as On-Balance Volume when their scales differ greatly across stocks. Its central point is that raw values cannot be compared meaningfully across companies when they reflect different trading volumes and business sizes. It suggests adjusting the indicator for company size, using revenue or market capitalization as possible reference measures.
It also raises price as a possible adjustment, on the reasoning that stock price may affect investor trading behavior, but favors size adjustment for comparing companies of different sizes and sectors. The answer is exploratory rather than a tested method: it provides no formula, empirical results, or guidance for choosing among adjustment measures. The appropriate normalization may depend on the indicator, so the suggestion should be treated as a starting point for analysis rather than a universal rule.
Key ideas
- Raw values of volume-based indicators may not support direct comparisons across stocks.
- Adjusting for company size, such as by revenue or market capitalization, is proposed as a way to improve comparability.
- Stock price may also affect trading behavior and could be considered in an adjustment.
- The usefulness of each adjustment depends on the indicator and requires further evaluation.
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Full text
# Comparing values of indicator between different stocks # Comparing values of indicator between different stocks I would like to ask whether there is a good way of analysing stock indicators that have no value limitations. For indicators like RSI we have a closed range ( 0 - 100 ) but in case of indicators like for example OBV we may have two stocks that have 10000000 and 1000 value of this indicator respectively in the same period of time. Does it make sense to discretize values of such indicators, by creating the same range (for example from 0 to 100) for each stock or it is completely senseless? ## Answer by Michael Hartmann (score 1) https://quant.stackexchange.com/a/37525 Technical analysis is not quite in my wheelhouse, but it's been an interesting topic to me, so hopefully I can lend a hand. Let's start with some basic assumptions: Because OBV is based on volume, there is obviously a huge range as you've pointed out. This makes comparison straight across companies impossible. To compare companies, you need to take out certain factors that could affect volume. My first inclination would be to adjust for the size of a company. Common markers of size would be revenue (REV) and market cap (MKCAP). I wouldn't have much hesitancy in using size as an adjustment for any company data. Thinking through it a bit more, because OBV is often seen as an indicator of how "smart money" is moving in an economy, you might want to adjust for price, as small investors will be slow to buy really expensive stocks and quicker to buy cheaper stocks. You may want to rethink this for other indicators, but it is an option. Looking at these two options I'd be more inclined to adjust an indicator for size. This way you can look at companies across a range of sizes and sectors. This might work better for some indicators and worse for other. I don't know how well these would work but it has sparked some interest for me, hopefully it helps you find what you're looking for!
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