Positive Volume Index (PVI) Indicator
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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.
The PVI helps in assessing trend strength and potentially confirming price reversals.
It can be calculated for popular market indexes as well as used to analyze movements in individual securities.
The Formula for the Positive Volume Index (PVI)
If today’s volume is greater than yesterday’s volume, then:
PVI = PPVI + ((TCP − YCP) / YCP) × PPVI
Where:
PVI = Positive Volume Index
PPVI = Previous Positive Volume Index
TCP = Today’s Closing Price
YCP = Yesterday’s Closing Price
If today’s volume is less than or equal to yesterday’s volume, the PVI remains the same.
How to Calculate the Positive Volume Index (PVI)
- If today’s volume is greater than yesterday’s, use the PVI formula.
- Input today’s price data and the previous PVI calculation.
- If there is no previous PVI, use today’s price as the initial PVI.
- If today’s volume is not greater than yesterday’s, the PVI stays the same.
Understanding the Positive Volume Index (PVI)
The PVI is typically followed in conjunction with a negative volume index (NVI) calculation.
Together, they are known as price accumulation volume indicators. The PVI and NVI were first developed by Paul Dysart in the 1930s, gaining popularity after being included in Norman Fosback’s 1976 book Stock Market Logic.
Fosback’s research showed 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%.
Traders use the PVI to identify trends: a rising PVI suggests bullish momentum, while a falling PVI indicates bearish trends.
Special Considerations
The PVI is based on the idea that high-volume days are driven by the crowd. When the PVI is above its one-year moving average (about 255 trading days), it signals optimism among traders, which may lead to further price increases. If the PVI falls below the one-year average, it indicates pessimism, signaling an impending or ongoing price decline.
Traders often plot a nine-period moving average (MA) of PVI and compare it to a 255-period MA. Crossovers between these lines can signal trend changes. For instance, if the PVI rises above the 255-period MA, it might indicate a new uptrend, confirmed as long as the PVI stays above the one-year average.
The PVI is not always accurate, and its signals should be interpreted with caution, especially during periods of high market volatility.
The Positive Volume Index (PVI) vs. On Balance Volume (OBV)
Both the PVI and OBV incorporate volume and price, but they calculate and interpret this data differently. The PVI focuses on whether volume increased from the previous session, while OBV sums positive and negative volume based on whether the price closed higher or lower than the previous day. As a result, the two indicators provide different trade signals and insights.
Limitations of Using the Positive Volume Index (PVI)
The PVI tracks “not-smart money,” or the crowd, which generally performs less well than professional traders. It can be prone to whipsaws, causing multiple crossovers in quick succession that make trend direction difficult to discern. The PVI can also experience anomalies, such as continuing to decline even when the price is rising.
To mitigate these issues, it is best to use the PVI alongside other technical indicators, price action analysis, and fundamental analysis, especially for longer-term trading decisions.
Concluding Thoughts
The Positive Volume Index offers insights into crowd behavior and volume-driven price changes, making it useful for confirming trends and spotting reversals. However, its limitations—such as susceptibility to false signals—mean it should not be relied on in isolation. Traders should combine the PVI with other analytical tools to make more informed decisions.
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