Understanding the Negative Volume Index (NVI)

The Negative Volume Index (NVI) is a volume-based trend indicator that focuses on price changes during periods of declining volume. It is used to identify long-term trends and potential reversals by analyzing the relationship between price movements and decreasing trading volume.

What is the Negative Volume Index (NVI)?

The NVI is a technical analysis indicator that emphasizes the significance of price changes on days when volume decreases compared to the previous day. It operates under the assumption that the smart money (institutions and informed traders) is active on low-volume days, making it a valuable tool for identifying long-term market trends.

How is the Negative Volume Index (NVI) Calculated?

The NVI is calculated using the following steps:

1. Initial Value:

   The initial value is typically set to 1000.

2. Daily Calculation:

   On days when the volume decreases compared to the previous day:

   $\text{NVI}_{\text{current}} = \text{NVI}_{\text{previous}} + \left(\frac{\text{Current Price} - \text{Previous Price}}{\text{Previous Price}}\right) \times \text{NVI}\_{\text{previous}}$

   On days when the volume increases:

   $\text{NVI}_{\text{current}} = \text{NVI}_{\text{previous}}$

Formula Example

Assuming a starting value of 1000 and using a simple moving average (SMA) for the moving average period, the calculation is as follows:

1. Initial NVI Value: 1000

2. Daily Changes:

   • If the volume decreases: Apply the price change formula.
   • If the volume increases: NVI remains unchanged.

3. Moving Average Calculation:

   Calculate the moving average of the NVI values over a specified period (e.g., 25 days).

Uses of the Negative Volume Index (NVI)

NVI is used for:

1. Trend Identification

• Long-Term Trend Indicator: Helps identify the direction of the long-term trend based on price changes during low-volume days.

2. Market Reversal Signals

• Reversal Indicator: Changes in the NVI can signal potential market reversals when compared with price trends.

Parameters

Here are the key parameters for configuring the Negative Volume Index:

• Data Offset (pod):

  • Default Value: 1
  • Min Value: 1
  • Max Value: 300
  • Description: Defines the number of periods used in the calculation.

• Data Type (data):

  • Default Value: cv (close and volume)
  • Options: cv (close and volume)
  • Description: Specifies the price and volume data used for calculation.

• Initial Value (initial_value):

  • Default Value: 1000.0
  • Min Value: 1
  • Description: The starting value of the NVI.

• Moving Average Period (ma_n):

  • Default Value: 25
  • Min Value: 1
  • Max Value: 300
  • Description: Number of periods for calculating the moving average of the NVI.

• Moving Average Type (ma):

  • Default Value: sma
  • Options: sma, ema, wma, tema, trima, dema, hma, mama, vma, kama, vidya
  • Description: Specifies the type of moving average used for the NVI.

• Line Type (line):

  • Default Value: 1 (NVI Values)
  • Options: 1 (NVI Values), 2 (NVI Moving Average)
  • Description: Chooses between displaying NVI values or its moving average.

Advantages of the Negative Volume Index (NVI)

• Trend Detection: Effective for identifying long-term market trends based on volume patterns.
• Reversal Signals: Provides insights into potential market reversals during low-volume periods.

Limitations of the Negative Volume Index (NVI)

• Volume Dependency: Performance can vary based on market conditions and volume patterns.
• Lagging Indicator: May lag behind actual market movements due to its reliance on historical data.

Conclusion

The Negative Volume Index (NVI) is a valuable tool for traders looking to understand long-term market trends and potential reversals. By focusing on price changes during periods of declining volume, it provides unique insights that can complement other technical analysis methods.