Negative Volume Index (NVI)
The negative volume index (NVI) is a powerful technical indicator that shows how price is being influenced by low-volume time frames.
What Is a Negative Volume Index (NVI)?
The Negative Volume Index (NVI) tracks the price movements and highlights the time frames in which the trading volume decreased from a specific point in time. One of the oldest indicators in the financial world, NVI was invented by Paul Dysart in the 1930s.
The premise behind the Negative Volume Index (NVI) is that a rising trend is one that continues even when
trading volume declines. The idea is that uninformative traders are to blame for the excessive trading volume. Also,
during the days with low trading volume, the informed traders (also called smart money) are at play.
Why Is Negative Volume Index (NVI) Used?
NVI is a great indicator to identify the mindset of smart money. Smart Money refers to the investment coming from big investors and is often associated with big price movements in the financial markets of any asset/stock/cryptocurrency.
Professional traders prefer to trade when the smart money isn't active which keeps the volatility level and the volume of the asset is low. This situation makes for a great opportunity to accumulate.
What Is a Positive Volume Index (PVI)?
The Positive Volume Index (PVI) can be used in tandem with the Negative Volume Index (NVI). While NVI measures the decrease in volume from specific points, PVI does the exact opposite. Generally, the increase of PVI is seen as a bearish signal and greater values of NVI are seen as a bullish one.
A 255-period moving average is used to determine trend reversals. It indicates a bull market when the NVI is above the 255-period moving average. Bearish sentiment is shown by the NVI falling below the 255-period moving average. In such a case, it sends out a sell signal; however, when it goes above the 255-period moving average, it suggests a buy signal.
Notice how the red NVI line remains flat when the
price is changing and only increases when the price drops. The price drop is considered as a buying signal for the smart money investors and this is also known as ‘
buying the dip’ in many situations.
What Is the Best Setting for Negative Volume Index (NVI)?
The value used in the NVI indicator is set to 255, however, you can change it depending upon the moving average you want to use while making a buying/selling decision.
Negative Volume Index (NVI) Formula
The NVI is calculated by comparing a single day's trading volume to the prior day's trading volume. Please note that NVI will only show a change if the volume has reduced from the previous day (time frame), which means that if today's volume is higher than yesterday, NVI shows no significant change.
If the value of the NVI is higher, it indicates that the volume is low and the price is increasing. Meanwhile, if the value of NVI is lower, it means that the price is falling as a low amount of investors are trading that asset at that given point in time.
The formula for calculating the Negative Volume Index (NVI) is as follows:
where:
- PNVI = Previous NVI
- TCP = Today’s closing price
- YCP = Yesterday’s closing price
The Negative Volume Index (NVI) is a powerful trading signal, however, it is recommended to use other
technical indicators, like
MACD,
RSI,
Aroon indicator, and
Klinger oscillator, to make an informed buying and selling decision.