What Is The Negative Volume Index Indicator & How To Trade With It

NEGATIVE VOLUME INDEX EXPLAINED

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.

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.

negative volume index on chart
negative volume index on chart

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 Negative Volume Index (NVI)?

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.

Using negative volume index indicator
Using negative volume index indicator

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 divergence
negative volume index divergence

Negative Volume Index trading strategy

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.

Negative Volume Index 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).
negative volume index buy setup
negative volume index buy setup

Negative Volume Index 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 sell setup
negative volume index sell setup

Negative Volume Index conclusion

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 Negative Volume Index indicator can be used on your trading platform charts to help filter potential trading signals as part of an overall trading strategy.