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Negative Volume Index

Parameters:

  • Source: The data source for the calculation.
    • Open Price: Uses the opening price of each period.
    • High Price: Uses the highest price of each period.
    • Low Price: Uses the lowest price of each period.
    • Close Price: Uses the closing price of each period.
    • Volume: Uses the trading volume of each period.
    • Weighted: A weighted price is typically calculated as (High + Low + Close + Close) / 4.
    • Typical: Calculated as (High + Low + Close) / 3.
    • Median: Calculated as (High + Low) / 2.

Style:

  • Customizable options for visual representation (line color, style, etc.)

The Negative Volume Index (NVI) is a tool used in technical analysis. It specifically concentrates on days when the trading volume is lower than the day before. Developed by Paul Dysart in the 1930s, the NVI assumes that the "smart money" or informed investors are more active on low-volume days, while the general public or less informed investors tend to trade more on high-volume days. Therefore, the NVI aims to track the behavior of these more informed investors.

How NVI Works: The NVI is calculated by updating its value only when the volume decreases from the previous day. On days when volume increases, the NVI remains unchanged. This selective updating process helps isolate periods when informed investors are likely making their moves.

Calculation Steps:

  • Determine Daily Volume Change: Compare the current day's volume to the previous day's volume.
    • The Negative Volume Index (NVI) gets updated when the volume for the current day is lower than that of the previous day.
    • If the current day's volume is greater than or equal to the previous day's volume, the NVI remains the same.
  • Calculate NVI:
    • If the volume decreases:

      NVI today = NVI yesterday + (Price Change / Previous Price) * NVI yesterday

      Where:

      • NVI today is today's NVI value.
      • NVI yesterday is yesterday's NVI value.
      • Price Change is the difference between today's and yesterday's closing prices.
      • Previous Price is yesterday's closing price.
  • Base Value: Typically, the NVI starts with a base value of 1,000, which can be adjusted according to the analyst's preference.

Key Aspects of NVI:

  • Focus on Low-Volume Days: By concentrating on days with declining volume, the NVI attempts to capture the actions of more informed traders who may be making strategic moves without attracting much attention.
  • Trend Confirmation: The NVI is often used with price charts to confirm trends. A rising NVI alongside a rising price trend can signal a strong bullish trend driven by informed traders.
  • Signal Generation: The NVI can generate buy or sell signals when it crosses its moving average. For example, a buy signal may be generated when the NVI exceeds its moving average, indicating increasing strength in the underlying trend.

Application of NVI:

  • Bullish Confirmation: If the NVI is trending upwards along with the price, it suggests that the trend is supported by informed investors, providing bullish confirmation.
  • Bearish Signals: On the other hand, if the NVI is decreasing as the price increases, it could signal a bearish divergence. This pattern suggests that the upward trend might not be sustainable.

Combining with Other Indicators:

  • Positive Volume Index (PVI): The NVI is often used with the Positive Volume Index (PVI), which focuses on high-volume days. These indicators provide a comprehensive view of market behavior across different volume conditions.
  • Moving Averages: Applying moving averages to the NVI can help smooth out short-term fluctuations and provide more precise signals.

Limitations:

  • Volume Dependency: The NVI's reliance on volume changes may be less effective in markets or securities where volume data is less reliable or significant.
  • Lagging Indicator: Like many technical indicators, the NVI can lag behind actual price movements, potentially providing delayed signals.

Conclusion: The Negative Volume Index is a unique and insightful tool for tracking the behavior of informed traders by focusing on low-volume days. Its ability to provide confirmation of trends and signal potential reversals makes it a valuable addition to a trader's toolkit. However, it is most effective with other indicators and analysis techniques to provide a well-rounded view of market dynamics. By understanding and applying the Negative Volume Index (NVI), traders can gain a deeper insight into market trends. This understanding helps in analyzing the actions of smart money, thereby aiding in making more informed trading decisions.