The Negative Volume Index (NVI) is a technical indicator that calculates the change in accumulation of price over a period of time. The Positive Volume Index (PVI) is a mirror of NVI. The NVI assumes that smart money will produce moves in price that require less volume than the rest of the investment crowd. It is said that the two indicators assume that “smart” money is traded on quiet days (low volume) and that the crowd trades on very active days. Therefore, the negative volume index picks out days when the volume is lower than on the previous day, and the positive index picks out days with a higher volume.
What is the Negative Volume Index (NVI)?
Negative Volume Index was developed by Paul Dizar in 1936; however, it got popularity in 1976 after Norman Fosbaka modified it.
This method assumes that numerous investors have ample amount of information when the markets suffer a decline in volume. However, when the markets start rising, the markets are mostly dominated by the average investors.
As the Negative Volume Index assumes that most of the investors have sufficient information when the markets face low volume and vice versa, hence, the days are very important when the volume falls significantly.
The NVI indicator can be used to identify what investors are trying to do in the markets. It is a really useful indicator especially in the bullish markets. According to its author, the success rate of this indicator is 95% when used in the bullish market and if the NVI line is above the yearly moving average. The probability of success reduces to 50% when the yearly moving average line is above the NVI line.
The indicator appears in a separate window below the chart as you can see in the above image.
Negative Volume Index calculation
The traditional methodology has been considered from the formula of Norman Fosbak, given in the book ” Logic of the stock market “.
How to use the NVI indicator?
It must be kept in mind that the NVI was actually designed to trade the daily timeframe. However, it does not mean that the indicator cannot be used on any other timeframe, depending on your preferred trading style and trading strategy.
According to Fosback, if the 255-day EMA is below the NVI value, it favors the bullish market while if the 255-day EMA is above the NVI value, then it is considered as bearish market.
However, the odds are not symmetrical and the probability of success may vary depending on situations if applied to the stocks market. However, if applied to commodities and the currencies then due to cyclic nature, the odds could be considered symmetrical.
The divergence between NVI line and the EMA (255) suggests the continuation of trend. As in the example below, the USD/CHF seems to continue the bullish bias.
Negative Volume Index trading strategy
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. Some professional forex traders prefer to trade when the smart money isn’t active which keeps the volatility level and the volume of the asset is low.
The Negative Volume Index (NVI) was developed to provide buy signals on a given equity when the price is trending upward while the volume is trending downward. The premise behind this indicator is that price changes on high volume days are a result of uninformed traders while price changes on decreased volume are due to informed traders. Per this premise, increases in the NVI are taken as indicative of smart money buying into the stock. Trend reversals are indicated by crossovers with a signal line which is a 255-period moving average of the NVI.
The Negative Volume Index can be solely used to find the trading signals. However, you may use any trend tool to filter the false signals.
NVI buy strategy
- Choose the daily timeframe and any trending currency pair.
- Wait for the Negative Volume Index line to cross the EMA (255) from bottom to top.
- Wait for the bullish candle to appear after NVI crosses EMA (255).
- Place the stop-loss below the recent swing low.
- We may look to exit when the NVI line comes back below the EMA (255).
NVI sell strategy
- Choose the daily timeframe and any trending currency pair.
- Wait for the Negative Volume Index line to cross the EMA (255) from top to bottom.
- Wait for the bearish candle to appear after NVI crosses EMA (255).
- Place the stop-loss above the recent swing high.
- We may look to exit when the NVI line comes back above the EMA (255).
Negative Volume Index conclusion
The Negative Volume Index (NVI) is a technical indicator used to identify trends in a market. It is a cumulative indicator, which means that all changes to the indicator accumulate. Put another way, the values used in the indicator in the current period will be used in future values for the previous period.
The Negative Volume Index is based on price and volume relation that tries to interpret the market conditions when investors act. Mostly it is the time when trading volume is light.
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.
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