The Negative Volume Index (NVI) tracks the price movements and highlights the time frames in which the trading volume decreased from a specific point in time.
One of the oldest indicators in the financial world, NVI, was invented by Paul Dysart in the 1930s.
The premise behind the Negative Volume Index (NVI) is that a rising trend continues even when trading volume declines.
The idea is that uninformative traders are to blame for the excessive trading volume.
Also, informed traders (also called smart money) are at play during days with low trading volume.
Why Is Negative Volume Index (NVI) Used?
NVI is a great indicator to identify the mindset of smart money.
Smart Money refers to the investment coming from big investors and is often associated with big price movements in the financial markets of any asset/stock/cryptocurrency.
Professional traders prefer to trade when the smart money isn’t active, which keeps the volatility level low and the volume of the asset low.
This situation makes for a great opportunity to accumulate.
What Is a Positive Volume Index (PVI)?
The Positive Volume Index (PVI) can be used with the Negative Volume Index (NVI).
While NVI measures the decrease in volume from specific points, PVI does the opposite.
Generally, the increase of PVI is seen as a bearish signal, and greater values of NVI are seen as bullish ones.
What Is the Best Setting for Negative Volume Index (NVI)?
The value used in the NVI indicator is 255; however, you can change it depending on the moving average you want to use while making a buying/selling decision.
Negative Volume Index (NVI) Formula
The NVI is calculated by comparing a day’s trading volume to the prior day’s.
Please note that NVI will only show a change if the volume has reduced from the previous day (time frame), which means that if today’s volume is higher than yesterday, NVI shows no significant change.
Its Significance in Trading
If the value of the NVI is higher, it indicates that the volume is low and the price is increasing.
Meanwhile, if the value of NVI is lower, it means that the price is falling as a low amount of investors are trading that asset at that given point in time.
The Negative Volume Index (NVI) is a powerful trading signal; however, it is recommended to use other technical indicators, like MACD, RSI, Aroon indicator, and Klinger oscillator, to make an informed buying and selling decision.