All About Negative Volume Index (NVI)

What is the negative volume indicator (NVI)?

Paul Dysart, a trader, created the negative volume index in the 1930s to track the asset's volume in order to determine whether "smart money" is in play. The term "smart money" refers to institutional investors' money and is widely used as a symbol of meaningful price movements within the asset.

If smart money is involved in an asset's price, then it would see a meaningful move that's supported by fundamentals and facts. Contrarily, if smart capital is not active, then price movements for an asset will be driven more by emotions and market events than solid facts.

Smart money is most active when there is calm in the market and assets have a low volume. Smart money, on the other side, is less active when markets are volatile and asset volumes are high.

How can you calculate the negative volume indicator (NVI).

Calculating the negative volume indicator indicator is very simple, unlike other technical indicators. Here's how it works.

- The index of negative volume always starts at 1,000

To arrive at the final NVI, add the percentage price change to an asset whose volume decreases to 1000.

- After you have calculated and recorded NVIon the chart it can be compared with the 255 day exponential moving average (EMA), to determine the trend.

When there is an increase of asset prices on low volumes, the negative volume indicator indicator will rise. The NVI also decreases when the asset's price drops on low volumes.

The NVI remains constant regardless of price movements, even if the asset's volume increases. It is why traders don’t bother to calculate the NVI on days with high volumes.

How can you use the Negative Volume Index (NVI)?

Norman Fosback, author of 'Stock Market Logic', has clearly explained how to use the NVI in order to determine the trend. Here is how it works.

First, determine the NVI for an asset.

The NVI can be compared with the 255-day exponential moving mean (EMA) of an asset.

He determined that a bull market would only be possible if the NVI was above the 255-day EMA.

He determined that a bear market would only occur if the NVI was below the 255-day EMA.

Negative volume index in action

Let's look more closely at the operation of this indicator. Below is a chart showing the price movement for an asset in the top-half, the NVI and 255-day EMA in the bottom-half.

This chart shows that the NVI is shown in blue, while the EMA appears in red. The price of an asset will move negatively if the NVI falls below its 255-day EMA.This is an indication of a bearish trend. The stock price will move positively if the NVI is above its 255-day EMA. This is an indication that there is a bullish tendency.

Conclusion

The trend can only be interpreted as a suggestion by the negative volume index. It does not confirm the trend. It is highly recommended to use the NVI together with other technical indicators to confirm that a trend has formed before you enter into trades. This indicator is primarily dependent upon the asset's volume so it can be used on broad market indices like the Nifty and Sensex.

This indicator can be used in certain cases on stocks that have high liquidity and volume.However, the NVI cannot be used to trade stocks that aren't heavily traded or assets with low volume data such as commodities and currencies.

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