Introduction
By examining the traded volume, the Positive Volume Index (PVI), a now widely-used technical analysis tool, helps evaluate the robustness of an asset’s upward price trend. Based on earlier work done by Paul Dysart in the 1930s, the PVI was further developed by Norman Fosback, a prominent technical analyst and author of numerous books on investing and stock market indicators. Fosback introduced the PVI in his 1985 book “Stock Market Logic” to evaluate the robustness of an asset’s upward trend based on changes in trading volume. Along with the PVI, Fosback also created the Negative Volume Index (NVI), an indicator that measures the strength of a downtrend.
To compute the PVI, a cumulative total of the percentage change in price on days when volume is higher than the prior day’s volume is multiplied by a “volume factor” and added to a starting value. The result is the PVI. The PVI is often presented as a line on a chart, along with the asset’s price. When the PVI rises alongside the price, it suggests a bullish signal, indicating that the upward trend is robust. Conversely, if the PVI falls while the price rises, it indicates a bearish signal, implying that the upward trend might be losing momentum.
Traders and analysts use the PVI in conjunction with other technical indicators and analytical techniques to spot trends and potential trading opportunities. Fosback’s research on market cycles and the use of quantitative approaches in investing is also noteworthy.
Also, check out the Negative Volume Index (NVI) for more insights.
Computing the Positive Volume Index
The Positive Volume Index (PVI) formula is as follows:
PVI = [Previous PVI + (Current Close - Previous Close) / Previous Close * Previous PVI Volume Factor]
Where:
- Previous PVI: the PVI value from the previous trading day
- Current Close: the closing price of the current trading day
- Previous Close: the closing price of the previous trading day
- Volume Factor: a factor used to adjust the PVI calculation based on the current day’s trading volume
To determine the Volume Factor, you must first calculate the percentage change in volume from the previous trading day:
Volume Ratio = Current Volume / Previous Volume
Next, compute the Volume Factor:
Volume Factor = 1 + (3 x Volume Ratio - 2) x Cumulative Volume Ratio
Where:
- Cumulative Volume Ratio: a running total of the Volume Ratio values, starting from the first day of the calculation.
The PVI is typically initialized with a value of 1, and the formula is repeated for each trading day to generate a series of PVI values. Traders and analysts can use these values to detect trends and possible trading prospects.
Understanding the Positive Volume Index in technical analysis
Traders and analysts can utilize the Positive Volume Index (PVI) as an effective technical analysis tool for assessing the robustness of a security’s upward trend by monitoring variations in its trading volume. This tool is particularly useful in identifying days when a security’s price rises on higher-than-average trading volume, indicating that the uptrend is likely to continue.
The PVI is a powerful indicator that can help traders gain insight into market sentiment and investor behavior. A rising PVI, combined with a rising price, signals strong buying interest and bullish sentiment in the market. This information can be especially helpful for traders looking to make strategic trading decisions based on market trends.
Additionally, the PVI offers valuable insights into market dynamics by examining the relationship between volume changes and investor behavior. It tracks the activities of less-informed market participants and assumes that increased trading volume signifies the presence of such investors. On the other hand, decreased volume suggests that informed investors are quietly establishing positions.
While the PVI’s primary purpose is to reveal the behavior of less-informed investors, it often correlates with price trends. Therefore, the PVI may not always be a reliable contrarian indicator. However, traders can combine the PVI with other technical analysis techniques, such as moving averages and trend lines, to gain a more comprehensive understanding of market trends and identify potential trading opportunities.
See table below: Based on data from 1941 through 1975 / Source: “Stock Market Logic” by Norman Fosback
| Indicator | Relative to 1-year Moving Average | Probability Bull Market in progress | Probability Bear Market in progress |
|---|---|---|---|
| PVI | Above | 79% | 21% |
| PVI | Below | 33% | 67% |
| NVI | Above | 96% | 4% |
| NVI | Below | 47% | 53% |
In conclusion, the Positive Volume Index is a useful tool that traders and analysts can utilize to detect trends and potential trading opportunities in the stock market. By monitoring changes in trading volume, the PVI can provide valuable insights into market sentiment and investor behavior, allowing traders to make more informed trading decisions.
Norman Fosback’s suggestions on how to use the Positive Volume Index
Norman Fosback, the inventor of the Positive Volume Index (PVI), suggested using this indicator in conjunction with other technical analysis tools to confirm or reject potential trading signals.
According to his book “Stock Market Logic,” traders should pay attention to situations where the PVI and price trend move in the same direction, indicating a bullish signal and a strong uptrend. Conversely, if the PVI is falling while the price is rising, it is a bearish signal, suggesting that the uptrend may be weakening.
Fosback recommended smoothing out the PVI using moving averages to identify significant trends. For example, traders could use a 20-day and investors could use a 1-year moving average of the PVI and look for crossovers with the security’s price trend as potential trading signals.
Fosback also warned traders that it is essential to be cautious of market manipulation and anomalies that could affect the PVI calculation, such as large one-time volume spikes that are not related to the underlying trend. Such anomalies could distort the PVI calculation, leading to false signals.
Overall, Fosback advised traders to use the PVI as one of several tools in their toolkit and seek confirmation from other technical analysis tools before making trading decisions based on PVI signals.
How to use the Positive Volume Index in trading?
Traders can use the Positive Volume Index (PVI) as a technical analysis instrument to detect possible trading prospects and verify or dismiss signals. For optimal results, it is recommended to utilize this tool in combination with other technical analysis instruments. Here are some practical tips for using the PVI effectively:
Confirm trends
Look for situations where the PVI and price trend are moving in the same direction, as this indicates a strong uptrend. If the PVI is falling while the price is rising, it’s a bearish signal that the uptrend may be weakening.
Identify significant trends
Use a moving average to smooth out the data and identify significant trends. A 20-day moving average of the PVI can help identify potential trading signals when it crosses over the security’s price trend.
Look for divergences
Watch for situations where the PVI and price trend are diverging, as this could indicate that the trend is losing momentum. For example, if the price is making higher highs while the PVI is making lower highs, it could be a bearish signal.
Identify entry and exit points
Use the PVI to identify potential entry and exit points for trades. For instance, if the PVI is rising along with the price trend, it could be a signal to enter a long position. If the PVI is falling while the price trend is rising, it could be a signal to exit a long position.
Beware of market anomalies
Be aware of potential market manipulation and anomalies that could affect the PVI calculation. For example, a large one-time spike in volume that is not related to the underlying trend could distort the PVI calculation and lead to false signals.
Adjust the PVI for market conditions
Market conditions can impact the effectiveness of the PVI. In a volatile market, the PVI may produce more false signals than in a stable market. Therefore, it may be necessary to adjust the parameters of the PVI, such as the moving average period, to suit the prevailing market conditions.
Use the PVI in conjunction with other indicators
Combine the PVI with other technical analysis tools, such as moving averages, trend lines, and support and resistance levels, to confirm or refute potential trading signals.
Overall, the key to using the PVI effectively is to combine it with other tools and techniques to gain a more complete understanding of market trends and potential trading opportunities. Traders should not rely solely on the PVI or any other indicator to make trading decisions, and should remain vigilant.
Advantages & Limitations of the Positive Volume Index
Here are some advantages and limitations of using the Positive Volume Index (PVI) in trading:
Advantages
- Detects changes in buying and selling pressure: The PVI can help traders identify changes in buying and selling pressure, providing valuable insights for trading decisions.
- Works well with other technical analysis tools: The PVI can be used alongside other technical analysis tools, such as moving averages and trend lines, to confirm or refute potential trading signals.
- Provides a long-term perspective: The PVI’s smoothing effect from the moving average allows for a long-term perspective on the underlying trend, enabling traders to identify significant changes in market sentiment.
Limitations
- Prone to false signals: Like any technical analysis tool, the PVI is prone to producing false signals, particularly in volatile markets or during sudden spikes in volume that don’t reflect the underlying trend.
- Difficult to interpret in isolation: The PVI is not useful when interpreted alone and should be used in conjunction with other technical analysis tools to confirm or refute potential trading signals.
- Limited to analyzing volume and price: The PVI only analyzes volume and price, ignoring other factors that could impact market trends, such as news events, economic indicators, and geopolitical risks.
Overall, the PVI can be a valuable tool for detecting changes in buying and selling pressure and providing a long-term perspective on market trends. However, traders should be aware of its limitations and use it alongside other tools to make informed trading decisions.
The Positive Volume Index is a valuable technical analysis tool that detects changes in buying and selling pressure in the market. It analyzes volume and price data, and by utilizing a moving average, it offers a long-term perspective on the underlying trend, assisting traders in making informed trading decisions. The PVI works best when used in combination with other technical analysis tools to confirm or reject potential trading signals.
Although the Positive Volume Index can provide valuable insights for trading, it is not an infallible predictor of future market trends or profitable trading opportunities. Traders must keep in mind the PVI’s limitations, including its susceptibility to generate false signals in turbulent markets. To make informed trading decisions, traders should use the PVI alongside other technical analysis tools and conduct thorough market research. Risk is inherent in financial trading, and traders must invest only what they can afford to lose.
