Negative Volume Index (NVI)

November 21, 2023 - Around 4 mins mins to read

What Is a Negative Volume Index (NVI)?

The Negative Volume Index (NVI) is an indicator that tracks price movements and identifies time frames when trading volume decreases from a specific point in time. Developed by Paul Dysart in the 1930s, NVI is one of the oldest indicators in the financial world.

The main idea behind the Negative Volume Index (NVI) is that a rising trend can continue even when trading volume declines. This is because uninformative traders are responsible for the excessive trading volume, while informed traders (referred to as smart money) are active during days with low trading volume.

Why Is Negative Volume Index (NVI) Used?

NVI is used to identify the behavior of smart money, which refers to investment from large investors and is often associated with significant price movements in financial markets. Professional traders prefer to trade when smart money is not active, as this keeps the volatility level low and the asset’s volume is also low. This situation presents a great opportunity for accumulation.

What Is a Positive Volume Index (PVI)?

The Positive Volume Index (PVI) can be used alongside the Negative Volume Index (NVI). While NVI measures the decrease in volume from specific points, PVI does the opposite by measuring the increase in volume. Generally, an increase in PVI is considered a bearish signal, while higher values of NVI are seen as bullish.

To determine trend reversals, a 255-period moving average is used. When the NVI is above the 255-period moving average, it indicates a bull market. Conversely, when the NVI falls below the 255-period moving average, it suggests a bearish sentiment and serves as a sell signal. A buy signal is indicated when the NVI goes above the 255-period moving average.

It is worth noting that the red NVI line remains flat when the price is changing and only increases when the price drops. This price drop is considered a buying signal for smart money investors and is often referred to as “buying the dip” in many situations.

What Is the Best Setting for Negative Volume Index (NVI)?

The default value used in the NVI indicator is 255, but it can be adjusted based on the desired moving average for making buying/selling decisions.

Negative Volume Index (NVI) Formula

The NVI is calculated by comparing the trading volume of a single day to the trading volume of the previous day. It is important to note that NVI only shows a change if the volume has decreased from the previous day. If today’s volume is higher than yesterday’s, NVI shows no significant change.

A higher value of NVI indicates low volume and an increasing price. Conversely, a lower value of NVI suggests that the price is falling due to a low number of investors trading the asset at that particular 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, but it is recommended to use other technical indicators such as MACD, RSI, Aroon indicator, and Klinger oscillator to make informed buying and selling decisions.