The world of financial trading is filled with various indicators that assist traders in making informed decisions about their investment choices. Among these, the Positive Volume Index (PVI) plays a crucial role in analyzing market trends. This article aims to provide a detailed perspective on PVI, its computation, usage, and overall relevance in the trading landscape.
Understanding the Positive Volume Index (PVI)
The Positive Volume Index is a technical analysis indicator that keeps track of price changes in securities or indexes corresponding to a rise in trade volume. Paul Dysart initially developed this indicator for market indexes using advance-decline numbers instead of prices. Later, Norman Fosback adapted it for individual securities – forming the version predominantly used today.
The Mechanism behind PVI
PVI increases or decreases in alignment with the price change in a security, but only on days when trading volume sees a rise compared to the previous day. In other words, if the current trading volume is higher than the previous period's, then the PVI changes. Conversely, if the volume doesn't increase, the PVI remains unchanged.
Interpreting PVI Signals
A PVI dropping below its one-year average (usually calculated over 255 days) is commonly interpreted as a 67% accurate sign of forthcoming bear market conditions. Simultaneously, increasing positive volumes may suggest overbought situations. Still, they also serve as a confirmation of price hikes. If prices plunge past the one-year high of the index, it signifies that trading has been augmenting despite price drops on those days, indicating potentially overbought conditions.
The Role of Volume in Market Indicators
The key to understanding the PVI lies in appreciating the significance of volume in market indicators. Both Dysart and Fosback held that volume is a crucial market indicator. Fosback also noted that the majority of uninformed investors would likely be active on days with the highest volume. In this light, the Negative Volume Index (NVI) becomes relevant as it monitors price changes on days when trading volume decreases, offering insights into 'smart money' activity.
Complementary Indicators: The PVI and NVI
Using PVI and NVI together can provide a broader market context. However, while they can be effective individually and collectively, no indicator provides a 100% accuracy guarantee. Market anomalies like whipsaws can distort true trends, leading to irregularities. Hence, astute traders often look for additional signals to either confirm or rethink potential trading decisions.
Practical Use of PVI in Trading
The PVI, often represented as a moving average to streamline its movements, is typically juxtaposed with a one-year average. Traders monitor the relationship of a nine-period PVI moving average (or other length) relative to the 255-period PVI moving average. When the PVI surpasses the one-year average, it aids in confirming a price surge. Conversely, if the PVI slips below the one-year average, it helps affirm a price slump. The Positive Volume Index serves as a powerful tool in a trader's arsenal, providing signals for price fluctuations based on positive increases in trading volume. By correctly interpreting and utilizing PVI in conjunction with other market indicators, traders can optimize their strategies, making informed decisions that lead to improved trade performance.
Summary
The Positive Volume Index (PVI) is a technical indicator that tracks increases in trade volume for an index or security, as well as the changes in price on those days. Paul Dysart developed the original version of this indicator for market indexes using advance-decline numbers instead of prices. The Positive Volume Index was then redesigned by Norman Fosback for individual securities – the version commonly used today.
Positive Volume Index increases or decreases with the price change in the security, but only on days when trading volume increases from the day before. A positive volume index which crosses below its 1-year average is purportedly a sign with 67% accuracy that bear market conditions are coming. Positive volume increases may indicate overbought conditions but are also confirmation of increasing prices.
If prices decrease past the one-year high of the index, it means that trading has been increasing despite decreases in prices on those days, and the conditions may be overbought, partially because increased demand should theoretically increase prices at some point.
Dysart considered volume to be the most important market indicator, and many traders today would agree. Fosback noted that the uninformed majority of investors were likely to be active on the days when the volume was highest, and both analysts felt that paying close attention the Negative Volume Index – which shows the days or weeks that saw decreases in trading volume, then compares changes in price on those days – would better indicate what the smart money was doing.
The PVI and NVI can be used together to give better context to the market, but while both indicators can be effective on their own and together, no indicator is 100% accurate. Whipsaws can obscure true trends, and other irregularities may arise. That’s why savvy traders will look for additional signals to confirm – or force them to reconsider – potential trading decisions. Tickeron’s Artificial Intelligence, known as A.I.dvisor, gives traders powerful ways to evaluate trade ideas, analyze signals, and provide the key confirmation needed to make rational, emotionless, and effective trades.
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