Positive volume index is a trading indicator providing price change signals. But how does this function with negative volume index? Find out in this guide!
- How is the Positive Volume Index Calculated?
- How to Use Positive Volume Index with the Negative Volume Index
- How to Use the PVI as Part of a Trading System
- Conclusion
The positive volume index (PVI) performs the same function as the negative volume index (NVI): using volume to help inform price movement in the future.
The positive volume index will rise on those days in which volume increases from the previous day. The concept behind this indicator is that the ‘not so smart’ money will see higher activity on days of higher volume and has higher emotional reaction to market movements resulting from that higher volume.
However, while there’s truth in this assumption, it’s not a stone-cold fact, and this can impact the indicator’s usefulness.
As volume typically rises in trending markets, the positive volume index will show a high correlation to price and tends to follow the general trend. Usually, the PVI is utilized on the daily timeframe, but it may be applied to bigger charting time compressions (such as weekly or monthly) instead.
Bear in mind, though, that a lot of charting software gathers volume data at the daily level or above — this means it works best for position or swing traders who hold onto assets for a number of days, weeks, or even months.
How is the Positive Volume Index Calculated?
When the day’s volume exceeds that of the previous day, the positive volume index will shift based on the following formula:
PVI = Yesterday’s PVI + [[(Close – Yesterday’s Close) / Yesterday’s Close] * Yesterday’s PVI
Whenever volume amounts to less than the prior day’s volume, or is equal to it, the formula is shortened to:
PVI = Yesterday’s PVI
How to Use Positive Volume Index with the Negative Volume Index
Traders will regularly use the positive volume index with the negative volume index.
When using the NVI, the indicator will increase when volume drops from the previous day based on the assumption that ‘smart money’ is active on days of lower volume. A trader may plot both the PVI and NVI and watch out for divergences to signal trading opportunities if they have faith in the validity of this assumption (i.e. ‘smart money’ is active on low volume days; ‘not so smart money’ is active on high volume days).
For instance, a buy/long opportunity could be viewed in the following conditions:
- PVI decreasing (‘not so smart’ money getting out)
- NVI rising (‘smart money’ getting in)
When studying PVI and NVI on charting software, keep in mind that the moving averages connected to each may indicate broader scale too. The indicators tend to be paired with 255 day moving averages, as there are around 250-255 trading days each year.
How to Use the PVI as Part of a Trading System
Traders often utilize positive volume index alongside negative volume index. Divergences between both are considered possible trade opportunities. To boost such signals’ accuracy, a trader could opt to combine this strategy with a type of trend following. You can take advantage of a basic moving average, or set of them, to achieve this.
For example, if we had a chart showing a decline in positive volume index and an increase in negative volume index, this would be a bullish setup and suggest ‘smart money’ were getting in, while the ‘not so smart money’ were getting out.
Let’s also say there was a 100 day simple moving average (SMA) sloping positively and biasing trades long.
So, with an obvious divergence between both in a bullish manner (i.e. positive volume index down, negative volume index up) with the 100 day SMA offering support to the trade, it could be a bullish entry. This would be most likely to occur with markets declining.
‘Smart money’ would buy the dip, while the ‘not so smart money’ would sell due to the volatility involved. The asset’s overall positive trend would support a moving average sloping positively. This type of setup would support the ‘buy low, sell high’ methodology.
Conclusion
The positive volume index highlights when the ‘not so smart money’ shows most market activity, and tends to be paid with the negative volume index. Divergences between the PVI and NVI are often utilized to discover potential trade opportunities.
Often, such setups form the basis for institutional traders’ decisions, particularly in equity markets. ‘Not so smart money’ usually sells their holdings during periods of turbulence and dropping prices in the market, as they’re more reactive to volatile price movements.
The ‘smart money’, though, typically considers the asset as getting lower in cost and, as a result, has a higher inclination to buy.
Still, the ‘not so smart money’ is more likely to hold or purchase more of an asset during periods of melt-ups in the market, in the belief that they’re making a wise investment. The ‘smart money’, though, will be more inclined to sell the asset assuming it will get more costly.
This setup type (utilizing positive volume index and negative volume index at the same time) can serve as a contrarian indicator.
Essentially, it’s up to the trader to determine which supporting indicators and modes of analysis are valuable in helping them spot trends, momentum, and other factors.
