Definition
The Negative Volume Index (NVI) is a technical indicator used in the analysis of stock market data to identify market trends. It specifically focuses on periods where the volume decreases from the previous period, with the belief that the period is being dominated by experienced, long-term traders. When the NVI moves above its one-year moving average, it can point to an upcoming bullish trend.
Phonetic
Negative Volume Index (NVI) can phonetically be transcribed as:”Neg-uh-tiv Vol-yoom In-dex”
Key Takeaways
- Negative Volume Index (NVI) – This is a technical indicator that relies on changes in a security’s volume to discern when smart or institutional investors are active. Essentially, NVI presumes that sophisticated investors are most active on quieter trading days.
- Usage and Interpretation – NVI is used alongside Positive Volume Index (PVI) to identify bull and bear markets. When NVI rises significantly, it’s believed that smart money is quietly acquiring positions. If NVI is trending upwards it could signal an upcoming bullish market, while a stagnant or falling NVI may indicate a bearish scenario.
- Limitations – Despite being a valuable tool, NVI isn’t infallible. It’s based on the assumption that large institutional investors have more information and insight than typical retail investors. However, there may be instances when this assumption does not hold, hence making NVI potentially misleading.
Importance
The Negative Volume Index (NVI) is a vital business/finance term, primarily as it allows financial analysts and investors to understand the behavior of “smart money” or discerning investors in a given market. This analytical tool focuses primarily on days where the trading volume decreases in comparison to the previous day. The underlying assumption is that on such days, the more sophisticated investors are active, and their trading decisions can offer important clues about the underlying market trends. Therefore, significant shifts noticed in NVI can help anticipate potential pivotal points and foresee long-term price movements in a stock or market, providing critical insights for investment decision-making.
Explanation
The Negative Volume Index (NVI) is a technical indicator used by investors and traders to identify potential buying opportunities in the market. It operates on the premise that smart, informed investors are most active on days when volume decreases. The NVI is derived by focusing on periods when trading volume decreases from the previous day. In this context, it essentially tries to determine what the ‘smart money’ is doing.The purpose of the NVI is to help investors identify market trends that may not be obvious through a basic analysis of price patterns. It assumes that on days of high volume, the crowd, or uninformed investors, dominate the market, while on quieter days, the smart, informed investors take the chance to reposition their portfolios. If the NVI is rising, it suggests that these informed investors are accumulating a particular security. From this, traders might infer further price increases and thus, the NVI serves as a signal to look out for in the pursuit of profitable investment opportunities. However, it’s crucial to use NVI in complement with other indicators to increase the accuracy of the predictive analysis.
Examples
1. Stock Market Trading: One of the most common places where the Negative Volume Index (NVI) is used is in the stock market. For instance, a trader may look at a company like Apple Inc. where if volume decreases from one day to the next and prices increase, the NVI will go up. If the volume is low and the price drops, the NVI remains unchanged. 2. Cryptocurrency Trading: NVI is also used in the volatile world of cryptocurrency trading. For example, in 2017 when Bitcoin skyrocketed in price, the NVI indicator often surged along with the price in periods of decreased volume, creating a helpful indicator for traders who use NVI to make buying or selling decisions.3. Forex Trading: NVI is also used in Forex trading. For instance, if a trader was looking at the EUR/USD pair and there is a decrease in volume with an increase in price, the NVI would rise. This could be interpreted as a bullish sign by the trader, thus informing their trading strategy.
Frequently Asked Questions(FAQ)
What is a Negative Volume Index (NVI)?
The Negative Volume Index (NVI) is a technical indicator that uses changes in trading volume to identify potential trading signals. It assumes that when volume decreases, the informed, professional investors are operating, and tracks price changes that happen on such days.
How is NVI calculated?
NVI is calculated by considering the current day’s volume relative to the previous day’s volume. If the current volume is less than the previous day’s volume, then the NVI is equal to the previous NVI plus the percentage change in price. If the current volume is higher, the NVI remains the same.
How can NVI be used in trading?
Traders use NVI to identify trend reversals and potentially profitable trade entry or exit points. If NVI is trending upwards, it signals that smart money may be buying into the market and could indicate a bullish market trend.
Does a rising NVI always indicate an upward trend?
No. Although a rising NVI may suggest that informed investors are buying, it does not guarantee an upward trend. It is a signal that traders might use as part of their analysis, but relying on it solely can lead to false signals.
What is the difference between Positive Volume Index (PVI) and Negative Volume Index (NVI)?
While NVI uses decreasing volumes to highlight the activity by sophisticated investors, PVI focuses on increasing volumes, which are often driven by the uninformed, novice investors.
Can NVI be used in any financial market?
Yes, NVI can be utilized in any market where volume data is available, including stocks, futures, and forex markets.
Is the NVI reliable on its own, or should it be used with other indicators?
Most traders prefer to use NVI in combination with other technical analysis tools and indicators to confirm signals and reduce the likelihood of false positives.
How can one improve the accuracy of NVI signals?
Incorporating a moving average or just using NVI in conjunction with market trend analysis can improve the accuracy of its signals. Examining the divergence between the NVI and the security’s price can also be helpful.
Related Finance Terms
- Market Sentiment
- Volume Indicators
- Positive Volume Index (PVI)
- Technical Analysis
- Trend Following
Sources for More Information
- Investopedia: https://www.investopedia.com/terms/n/nvi.asp
- Fidelity: https://www.fidelity.com/learning-center/trading-investing/technical-analysis/technical-indicator-guide/nvi
- Corporate Finance Institute: https://corporatefinanceinstitute.com/resources/knowledge/trading-investing/negative-volume-index-nvi/
- MarketVolume: https://www.marketvolume.com/analysis/studylibrary_technical_indicators/negative_volume_index.asp
