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What is a Negative Volume Index?

NVI can be used to determine what smart-money investors may do.

The Negative Volume Index (NVI) is a technical indicator used by traders to identify potential changes in stock prices. It is based on the observation that when volume decreases significantly, it usually signals major buying activity and an impending price rise. Conversely, when volume increases dramatically, it typically suggests large selling pressure and a subsequent decrease in price.

To calculate the NVI, traders first identify a period of consecutive days in which decreasing volumes occur. The NVI value is equal to the closing price on the day before the volume started to decrease, plus any increases in prices during the period. To put this into practice, if the volume decreases for 5 consecutive days and prices increase over that period, the NVI value is equal to the closing price of the day before the volume began to decrease plus all increases in prices over that 5-day period.

Traders typically use this technical indicator alongside other indicators, such as moving averages and support/resistance levels, when making trading decisions. This allows them to gain a better understanding of the current market trend. By recognizing when volume decreases and prices increase, traders can take advantage of potential opportunities to earn profits in the stock market.

The Negative Volume Index is an important tool for technical analysis, and it helps traders understand how shifts in volume can affect stock prices. By using this indicator alongside other indicators, traders are better able to identify trends and make informed trading decisions.

Simplified Example

A negative Volume Index can be thought of like a game where the more people play, the fewer points you score. Imagine you're playing a game where the goal is to collect as many points as possible. But, if more and more people start playing the game, the points you earn for each round decreases. So, the more popular the game becomes, the harder it is to score points. This is similar to how the Negative Volume Index works in the stock market. When there's a lot of buying and selling activity, it can be a sign that the price of a stock is changing, but it becomes harder to determine which direction it's going.

Who Invented The Negative Volume Index (NVI)?

Paul Dysart, an American stock market technician, is attributed to the creation of the Negative Volume Index (NVI) in the 1930s. In his efforts to provide a comprehensive set of indicators, Dysart developed the NVI as a counterpart to the Positive Volume Index (PVI), another indicator of his creation. These cumulative indicators leverage volume changes to discern market trends.

Examples

Stock Market Correction: The Negative Volume Index can indicate a stock market correction when the volume of trading decreases while prices continue to rise. This can indicate a lack of demand for the assets, leading to a potential sell-off and price correction. In this scenario, the Negative Volume Index would signal a bearish market, and traders may choose to reduce their exposure to the market.

Reduced Liquidity: In a market where liquidity is reduced, the Negative Volume Index can be a useful indicator of potential price declines. When liquidity is low, it can be more difficult for traders to buy and sell assets, leading to price swings and decreased volumes. The Negative Volume Index can indicate a market that is losing steam and may be headed for a decline.

Overbought Market: The Negative Volume Index can indicate an overbought market when the volume of trading decreases while prices continue to rise. This can be a sign that the market is reaching its peak and may soon experience a correction. Traders may use the Negative Volume Index to identify potential sell signals, as the decline in volume may indicate that the market has reached its limit and may be headed for a decline.

  • Market: A place or system where buyers and sellers come together to exchange goods, services, or financial instruments.

  • Negative Volume Index: A technical indicator used by traders to identify potential changes in stock prices.