What is the Positive Volume Index (PVI)?
The positive volume index (PVI) is an indicator used in technical analysis that provides signals for price changes based on positive increases in trading volume. A PVI can be calculated for popular market indexes. It can also be used to analyze movements in individual securities. It helps in assessing trend strength and potentially confirming price reversals.
- The PVI is based on price moves depending on whether the current volume is higher than the previous period.
- If volume doesn't increase from one period to the next, the PVI stays the same.
- The PVI is often shown as a moving average (to help smooth out its movements) and compared to a one year average (255 days).
- Traders watch the relationship of a nine-period PVI moving average (or other MA length) relative to the 255-period PVI moving average.
- When the PVI is above the one-year average it helps confirm a price rise. When the PVI drops below the one-year average it helps confirm a price drop.
The Formula for the Positive Volume Index (PVI) is
If volume today is greater than volume yesterday:
Positive Volume Index (PVI)=Previous PVI+Yesterday’s Closing Price(Today’s Closing Price-Yesterday’s Closing Price)∗Previous PVI
If volume today is less than or equal to volume yesterday:
How to Calculate the Positive Volume Index (PVI)
- If volume today is greater than volume yesterday, then use the PVI formula.
- Input price data for today and yesterday, along with the previous PVI calculation.
- If there is no previous PVI calculation then use the price calculation from today as the previous PVI as well.
- If volume today is not greater than volume yesterday, then the PVI stays the same for that day.
What Does the Positive Volume Index (PVI) Tell You?
PVI is typically followed in conjunction with a negative volume index (NVI) calculation. Together they are known as price accumulation volume indicators.
PVI and NVI were first developed in the 1930s by Paul Dysart, who used market breadth indicators such as the advance-decline line to generate the PVI and NVI. The PVI and NVI indicators gained popularity following their inclusion in a 1976 book titled "Stock Market Logic" by Norman Fosback, who expanded their application to individual securities.
Fosback's research, which encompassed the period from 1941 to 1975, suggested that when the PVI is below its one year average there is a 67% chance of a bear market. If the PVI is above its one year average, the chance of a bear market drops to 21%.
Generally, traders will watch both PVI and NVI indicators to get a sense of the market’s trend in terms of volume. PVI will be more volatile when volume is rising and NVI will be more volatile when volume is decreasing.
Since the primary factor of PVI is price, traders will see the PVI increasing when volume is high and prices are increasing. The PVI will decrease when volume is high but prices are decreasing. Therefore, the PVI can be a signal for bullish and bearish trends.
The general belief is that high volume days are associated with the crowd. When the PVI is above its one-year moving average (about 255 trading days), it shows that the crowd is optimistic which helps fuel price rises. If the PVI falls below the one-year average, that signals the crowd is turning pessimistic, and a price decline is forthcoming or is already underway.
Traders will often plot a nine-period moving average (MA) of PVI and compare it to a 255-period moving average of PVI. They will then watch for the relationships as described above. Crossovers signal potential trend changes in price. For example, if the PVI rises above the 255-period MA from below, that could signal a new uptrend is underway. That uptrend is confirmed as long as the PVI stays above the one-year average.
Keep in the mind the probabilities mentioned above. The PVI signals are not 100% accurate. Generally, the PVI compared to a one-year MA helps confirm trends and reversals, but it won't be correct all the time.
Some traders prefer the Negative Volume Index (NVI) over the PVI, or they use them together to help confirm each other. The reason is that NVI looks at lower volume days, which are associated with professional trader activity, and not the crowd. Therefore, NVI shows what the "smart money" is doing.
The Difference Between the Positive Volume Index (PVI) and On Balance Volume (OBV)
Positive volume is a price calculation, based on whether volume rose in the current session relative to the prior. On balance volume is a running total of positive and negative volume, based on whether the price today was higher or lower than the price yesterday, respectively. While both indicators are factoring volume and price, they do it in very different ways. Because the calculations are different, they will provide different trade signals and different information to traders.
Limitations of Using the Positive Volume Index (PVI)
PVI is tracking the crowd, whose activity is typically associated with higher volume days. The crowd typically loses money, or fairs less well than professional traders. Therefore, PVI is tracking the "not-smart-money". For better quality signals, and for a better context of what a particular market or stock is doing, the PVI is used in conjunction with NVI.
In the historical tests, PVI did a decent job of highlight the bull and bear markets in price. Although it is not 100% accurate...nothing is. The indicator can be prone to whipsaws, which is when multiple crossovers occur in quick succession, making it hard to determine the true trend direction based on the indicator alone. The PVI is also prone to some anomalies. For example, it may move continually move lower, even if the price is rising aggressively. For these reasons, it is recommended traders use the PVI along with price action analysis, other technical indicators, and fundamental analysis if looking at longer-term trading opportunities.