The Negative Volume Index (NVI) is a technical analysis tool used by traders and analysts to assess the relationship between trading volume and price movements in financial markets. The NVI focuses on days when the trading volume is lower than the previous day’s volume, illustrating how price movements are influenced by decreasing volume.
Calculation of Negative Volume Index (NVI)
Formula for NVI
The NVI is calculated using the following formula:
Where:
- \( NVIt \) is the Negative Volume Index at time \( t \).
- \( P_t \) is the price at time \( t \).
- \( P_{t-1} \) is the price at time \( t-1 \).
- \( V_t \) is the volume at time \( t \).
- \( V_{t-1} \) is the volume at time \( t-1 \).
Step-by-Step Calculation
Base NVI Calculation:
- Start with an initial NVI value, often set at 1000.
Determine Volume Changes:
- Compare the current day’s trading volume with the previous day’s volume.
Update NVI:
- If the current day’s volume is less than the volume on the previous day, update the NVI using the given formula.
- If the volume is equal to or greater than the previous day’s volume, the NVI remains unchanged.
Significance of Negative Volume Index (NVI)
Market Insight
The NVI is particularly significant as it provides insight into how market prices react on days with lower trading volumes. It assumes that smart money (institutional investors) is more active on low-volume days. Thus, significant price movements on these days could indicate underlying trends and investor sentiment.
Indicator for Market Trends
Traders often use the NVI in conjunction with other indicators to confirm market trends. An increasing NVI suggests that the price is likely to rise even on lower volume days, potentially revealing a bullish trend. Conversely, a decreasing NVI may indicate a bearish trend.
Applications of Negative Volume Index (NVI)
Portfolio Management
Investors use NVI to manage their portfolios by identifying underlying bullish or bearish trends. It helps in making informed decisions regarding asset allocation and risk management.
Technical Analysis
Technical analysts utilize the NVI to support or refute signals derived from other indicators. It acts as a supplementary tool to validate market movements and establish more robust trading strategies.
Historical Context and Development
The Negative Volume Index was introduced by Paul Dysart in the 1930s. Dysart’s work pioneered the concept of volume-based market indicators, which has since evolved into a crucial aspect of technical analysis.
Comparisons and Related Terms
Positive Volume Index (PVI)
Unlike the NVI, the Positive Volume Index (PVI) focuses on days when the trading volume is higher than the previous day’s volume. It assumes that uninformed investors drive market prices on high volume days.
On-Balance Volume (OBV)
The On-Balance Volume (OBV) indicator is another volume-based tool that accumulates volume to predict price movements. Unlike NVI, OBV considers all trading days regardless of volume changes.
FAQs
How is the NVI different from traditional volume analysis?
Can NVI be used for all asset classes?
Does NVI work well with other technical indicators?
References
- Murphy, John J. Technical Analysis of the Financial Markets. New York Institute of Finance, 1999.
- Dysart, Paul. The Study and Analysis of Volume. 1930.
Summary
The Negative Volume Index (NVI) is an essential tool in technical analysis, providing insight into price movements on days with decreased volume. By understanding and utilizing the NVI, traders and analysts can gain a deeper look into market trends, making more informed decisions in portfolio and risk management.
