Nvi: Negative Volume Index Definition & Meaning

Purchasing stocks without market research beforehand is considered speculating rather than investing. You incur losses when you speculate. A stock’s price might drop to its lowest point in a few days, even if you have been watching it for a month and it has been climbing daily. You can never tell where the stock price is going until you know the best time to enter the market. How can you help this situation? 

What is the Negative Volume Index?

Before delving more into it, you should be aware of how trade volume affects the NVI. A stock may see more price increases if it has strong demand and purchasers are purchasing it, as shown by a high trading volume and growing price. Conversely, if a company’s price is down despite its high trading volume, this suggests that investors are selling the shares, which might lead to an even lower price. Moving on, let’s discuss the NVI. 

One technical Negative Volume Index indicator MT4 for determining the market’s direction is the NVI. Since it is a cumulative indicator, data from the present period will be applied to values from earlier periods in the future. 

Features of NVI

• One of the greatest trendlines for tracking the activities of shrewd money investors is the NVI. 
• The PVI trendlines, in contrast to the NVI, are more closely associated with spikes in volume that occur when both noise and smart money traders enter the market.
• When a security’s price drops after a period of high-volume trading, the NVI is very helpful. Although the indicator mainly follows the trading decisions of high-net-worth individuals, it is usually recommended that both NVI and PVI be utilized together. 
• They offer a more comprehensive view of the relationship between volume and a security’s price. 

Calculator of the NVI?

A comprehensive formula is available to help you how to calculate the negative volume index. 

(P(t) – P(t)-1) x NVI(t)-1/ P(t)-1 = NVI (t)

• Negative Volume Index at Time t = NVI (t)
• P(t) is the index level or price at t.

How to recognise an NVI?

When a security’s price rises, and the volume decreases, the PVI and NVI were intended to produce trading signals. 

As we have mentioned, the indicator is predicated on the notion that ignorant traders control the market, which leads to price swings on days of large volume. On the other hand, smart money investors drive price movements on days with low trading volume.

Nevertheless, a rise in NVI indicates that institutional investors and other knowledgeable market players are purchasing the asset. Meanwhile, crosses with a signal line—the 255-day MA of the NVI—mark trend reversals.  

In short, there is a purchase signal if the NVI crosses over the signal line. On the other hand, a sell signal is present if it drops below the signal line. The NVI’s EMA has a default setting of 255 days.

Chartists frequently utilize the NVI with stocks, ETFs, and other assets, even though it was primarily intended for large stock indexes. However, the NVI might differ between various indices and equities. For example, the NVI may be more negative on a particular stock when it is above the 255-day EMA on the chart of an index such as the S&P 500. 

Applying the NVI to a daily chart might help day traders gain a more comprehensive understanding of the market. Nevertheless, traders who are more concerned with short-term gains should monitor long-term patterns since doing so might increase the likelihood of success.

The Negative Volume Index’s Restrictions

The NVI has several restrictions when the value falls below the 255-day EMA. The likelihood of a negative trend only somewhat increases in such a scenario. Despite the Negative Volume Index findings, the market can still be positive.

Furthermore, whipsaws can easily cause the NVI indicator to malfunction. With extremely erratic price swings, the NVI could not generate reliable trading indications. 

Comparing Negative volume index vs positive volume index

In the same way that the Negative Volume Index may be used to assess the activity of smart money, the Positive Volume Index (PVI) can be used to assess the activity of less smart money. The money invested by retail investors—who typically lack sufficient knowledge and are prone to make emotional decisions—is referred to by this phrase. Growing trade volumes are the basis for the PVI’s trading signal generation.

Can both the indexes be used together?

Traders can utilize PVI and NVI on a security chart to seek divergences based on the belief that low-volume days are times when smart money investors dominate the market and high-volume periods are driven by casual investors.

Let’s take the scenario where the PVI is decreasing. Since it may indicate that irrational investors are pulling out of the market, this is sometimes viewed as a buying opportunity. Similarly, an increasing NVI may indicate that institutional investors are purchasing security, indicating a possible buying opportunity.  

Conclusion

To provide traders with a better understanding of how price movements are impacted on days when trading volume is down, the Negative Volume Index strategy is a technical signal line that considers both price and volume. Smart money is the NVI’s primary goal. It is recommended to combine PVI with NVI in order to have a deeper understanding of how volume affects pricing.

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