As a stock market investor, you require having a sound understanding of stock markets. Once you have mastered the basics, you now need to look for long-term investing and trading opportunities through fundamental analysis and assessment of technical indicators. Technical indicators, like the Positive Volume Index (PVI), Negative Volume Index (NVI), price action analysis – to name a few – will allow you to assess the market trends and reversals, thus allowing you to know the price direction of stocks and securities. You must, however, remember that – as the name suggests – market indicators such as Positive Volume Index are merely sign-posts, and have their own limitations. Stock markets are governed by complex variables, and no matter how strong an indicator is, you can’t remain assured about guaranteed returns.
What is Positive Volume Index (PVI)?
Wondering, what is Positive Volume Index? Well, PVI is used for technical analysis of the price changes in the market, based on trading volume. PVI indicates price movements after factoring whether the present trading volume is greater than the volume for a previous period. PVI is usually calculated on a daily basis. It can also be seen against a Moving Average (MA) of 255 days, which is the average trading days in a given year, or on a weekly, monthly, quarterly and half-yearly basis. If the trading value remains the same between different time periods, the PVI will remain unchanged. Usually, PVI is used for technical analysis along with NVI, and when used together, the analysis is known as : price accumulation volume indicators. Before knowing more about the features of PVI, let’s have a look at its history.
History of PVI : Paul L Dysart developed the PVI and NVI in 1936, after analysing the volume of a day’s trade in the New York Stock Exchange (NYSE). Primarily, considering the volume of trading, he collected an aggregate for a specific time period. When the trading volume was greater, he termed it as PVI, and in the case of lower trading volume, he called it NVI. The advances and declines in the trading volume was the key for interpreting the market movements. PVI and NVI gained further acceptance in stock markets, when one of the best market forecasters in the USA, Norman Fosback , in 1976, included their interpretations in his bestseller: ‘Stock Market Logic.’ Fosback enhanced the scope of PVI and NVI by expanding their horizons to individual stocks and securities.
Formula for calculating Positive Volume Index : If you have to calculate the PVI for a specific day such as October 15, 2020, which was Thursday, then you need to take into account the trading volume of Thursday as well as of Wednesday.
If Thursday’s PVIwas greater than that of Wednesday, you can use the following formula :
PVI = Wednesday’s PVI + ((Thursday’s close-Wednesday’s close)/ Wednesday’s close)*Wednesday’s PVI.
If Thursday’s trading volume was equivalent or less than Wednesday’s trading volume then the formula will be:
PVI = Wednesday’s PVI.
Understanding the concept of the Positive Volume Index :
– PVIis based on the concept of analysing the herd/crowd, or uninformed investors, also called as the not-so-smart-money. Conversely, the NVI primarily considers select investments, informed investors, or the smart money. So, an increase in PVI means that the not-so-smart-money is more active, while a decrease in PVI signifies that the herd money (not-so-smart-money) is getting out of markets. When PVI and NVI are juxtaposed, you can analyse the dissimilarities to plan for suitable trading opportunities. Using Moving Averages to look at the difference between smart money and not-so-smart money can allow you to reach a broad conclusion about the market trends and reversals.
– If you analyse the difference between PVIand NVI, for a period of say 120 days, and find that the PVI has decreased along with a corresponding increase in NVI, then it indicates a bullish phase – with a rising market. On the other hand, the converse might well suggest a bearish market – with decrease in stock values. In other words a negative PVI can be associated with a bullish market, while a positive PVI is generally seen in a bearish market.
– It is also important to understand the correlation between the different market phases and PVI. According to market experts, whenever there is market turbulence, the PVI or the not-so-smart-money declines. This is because the crowd will usually sell off their stocks due to declining prices. Also, in the case of market melt ups – when the stock market improves primarily because of investor sentiment, and not because of real growth in economic indicators – the PVI will spike.
– You must, however, remember that although the Positive Volume Indexis generally identifiable with a bearish market, it moves in tandem with the price direction. So it is never a contrarian indicator ( an indication against the investor sentiment).
Thus, PVI is an accumulative index, considering changes in trading volume, to identify when uninformed investors or not-so-smart-money is active in stock exchanges. It is usually used in tandem with NVI to zero in on the right investment opportunities. Along with using technical analysis, like the Positive Volume Index, you should always consider other key factors, like your investment goals, risk appetite and existing financial situation, before making investment decisions. Alongside, you must always choose a trusted and reliable financial partner, which can provide you with cutting-edge trading platforms with a single-point access to multiple stock exchanges. Look for features such as 2-in-1 Demat-cum-Trading account, detailed reports from experts and real-time stock updates.