Typically, the PVI is used in tandem with a negative volume index (NVI) calculation. Collectively, these metrics are referred to as “price accumulation volume indicators.” It is common practice to utilize both the negative volume index and the positive volume index, both of which were developed by Norman Fosback, to determine whether a market is bullish or bearish.
The Positive Volume Index (PVI) is based on how prices change when trading volume goes up. PVI is designed to monitor the price changes that the “uninformed” public is trading during high volume periods since it is widely believed that these periods are driven by beginner traders.
If the Positive Volume Index drops below its 255-period moving average, it signals a bearish market. The reverse is the case for a bullish market. The only thing that needs to be put in is the number of periods used to figure out the signal line (the moving average of PVI). In this article, we will go into great detail about the PVI indicator and ways to trade with it.
What is the Positive Volume Index Indicator?
You may be wondering, “What exactly is the positive volume index?” Well, PVI is used in volume-weighted technical analysis of price movements in the market. PVI suggests that “uninformed” investors are joining the crowd and entering the market when volume is high. However, “smart money” tends to quietly take positions on days with lower volume. That’s why the PVI reveals the moves of the average investor. The PVI shows the movements of the “not-so-smart money,” while the NVI follows the movements of the “smart money.” But keep in mind that the PVI isn’t a contrarian indicator. The PVI may reveal the actions of the “not-so-smart money,” but it follows price swings in the same direction.
Both the Positive Volume Index (PVI) and the Negative Volume Index (VMI) are indicators that follow changes in the total number of trades (or trading volume) for a certain currency pair. In general, price fluctuations during times of low trading volume are seen as a good sign, whereas price fluctuations during periods of high trading activity are seen as a negative one. The indicator is based on the idea that traders who know what they’re doing (the “smart money”) trade less, while traders who follow the crowd (the “not-so-smart money”) trade more.
PVI Indicator Strategy
The PVI is seen as a sign that a lot of “uninformed” investors are trading on days when a lot of money is changing hands. In contrast, “smart money” tends to take positions on days with little trading activity. Thus, the PVI may reveal the activity of average traders. When the PVI is above its one-year moving average, it indicates a bull market, and when it is below, it indicates a bear market. The Positive Volume Index can’t yet be used on intraday charts because of the way the data is set up.
The 255-period moving average is often used as a standard to measure the Positive Volume Index against. When the index rises over this level, uninformed traders (the herd) tend to buy, suggesting that prices may rise further. When the index falls below this level, it’s a sign that uninformed traders are selling, suggesting the index may fall.
Buy Signal
- When the PVI rises above the 255-period moving average, a trader could look for long trade opportunities.
- Close the open buy trade when the opposite signal is generated or in accordance with your personal money management strategy.
Sell Signal
- When the PVI drops below the 255-period moving average, a trader could look for opportunities to sell.
- Close the open sell trade when the opposite signal arises or according to your personal money management strategy.
Positive Volume Index Pros & Cons
Pros
- The PVI is effective in predicting bull or bear markets.
- In general, comparing the PVI to a one-year MA confirms trends and reversals.
- The positive volume indicator gives signals for price movements
Cons
- The indicator can be susceptible to whipsaws, which occur when many crosses occur rapidly, making it difficult to detect the underlying trend direction using the indicator alone.
- The PVI is also vulnerable to certain anomalies. For example, even though the price is growing rapidly, it can continue to fall.
Conclusion
The PVI is a cumulative index that looks at changes in the number of trades to figure out when investors who don’t know much about the forex market are active. The PVI is monitoring the crowd, whose behavior is often seen on days with greater volume. Generally, the crowd loses money or performs worse than expert traders. In combination with the NVI, the PVI is used for higher-quality signals and a better understanding of a market’s performance.
It is often used in conjunction with NVI to identify the best trading opportunities. Technical analysis, like the Positive Volume Index, can help you make trading decisions. However, you should also keep in mind your investment goals, how much risk you are willing to take, and your current financial situation. The PVI is not failure-proof, so it is best to use it in combination with other trading tools for better performance.
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