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Positive 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 Positive Volume Index (PVI), created by Paul Dysart in the 1930s, is a key tool in technical analysis. This indicator is designed to spot market trends and signals that suggest a bullish outlook. It specifically zeroes in on trading days where there has been an increase in volume compared to the previous day. The underlying premise of the PVI is that it reflects the actions of less-informed retail investors, who are thought to be more active on higher volume days.

How PVI Works: The PVI is calculated by adding a percentage change in price to the previous PVI value when the current day's volume is higher than the previous day's. If the volume decreases, the PVI remains unchanged. This approach allows the PVI to focus exclusively on the days when there is increased trading activity, potentially indicating heightened interest or speculation in the asset.

Formula for PVI Calculation:

  1. Identify Volume Increase: Verify whether the volume of the current day surpasses that of the previous day. Examine if today's trading volume exceeds yesterday's trading volume.
  2. Calculate PVI:
    • If the volume has increased:

      • PVI = Previous PVI + (Current Price - Previous Price) / Previous Price * Previous PVI

    • If the volume has decreased or remains the same:

      • PVI = Previous PVI

Key Aspects of PVI:

  • Volume Sensitivity: The PVI is highly sensitive to changes in volume. It reacts only to days with increased volume, which are assumed to represent the actions of retail investors.
  • Trend Confirmation: When used with the Negative Volume Index (NVI), the PVI can help confirm trends. The PVI is typically more volatile, reflecting the influence of trading volume on price movements.
  • Bullish Signal: A rising PVI often suggests a bullish trend, especially when the PVI is above its moving average. Conversely, a declining PVI may indicate a bearish trend or a period of consolidation.

Application of PVI:

  1. Trend Confirmation: Traders use the PVI to identify the direction of the trend based on the behavior of retail investors. A rising PVI suggests increasing optimism and buying pressure among less-informed investors.
  2. Signal Confirmation: When the PVI crosses above its moving average, it can be seen as a bullish signal, suggesting a potential uptrend. Conversely, a cross below the moving average may signal a downtrend.
  3. Combination with NVI: The PVI is often used alongside the NVI, which tracks price changes on lower volume days and is believed to reflect the actions of more informed institutional investors. The interplay between PVI and NVI can provide a comprehensive view of market sentiment and trend strength.

Limitations:

  • Retail Bias: The assumption that high-volume days reflect retail investor activity may not always hold, as institutional investors can also drive high volume.
  • Lagging Indicator: The PVI is a lagging indicator, meaning it may respond to market trends after they have already begun to develop.
  • Market Conditions: In markets with consistently high or low volume, the PVI may not provide as clear signals.

Conclusion: The Positive Volume Index is a valuable tool for traders looking to understand the impact of volume on price movements and to identify potential bullish trends driven by retail investor activity. The PVI provides insights into market sentiment and potential trend changes by focusing on days with increased trading volume. However, it is most effective when used with other indicators, such as the NVI, to obtain a more comprehensive view of market dynamics and confirm the validity of signals. As with any technical indicator, the PVI should be part of a broader trading strategy considering various market analysis aspects.