Negative Volume Index indicator or NVI is a cumulative indicator. It is uses the change in volume to decide when the smart money is active. This indicator is first developed by Paul Dysart in the 1930s. The Market Technicians Association selected Dysart for their annual award in 1990. This indicator works under the assumption that the smart money is active on days when volume decreases. Also it works under the assumption the not-so-smart money is active on days when volume increases.
Negative Volume Index indicator rises on days of positive price change on lower volume and falls on days of negative price change on lower volume. This indicator remains unchanged on days of higher volume no matter what the price action. The idea is that mainly smart professional traders buy and sell during relatively quiet periods of declining volume.
We may calculate Negative Volume Index for any time interval, such as minutes, hourly, daily, weekly, and monthly. Traders may calculate this indicator using any market index, stock or commodity, as long as there is data for closing price and volume. Here the creators of the indicator has used volume only as a qualifier to determine whether or not to include the day’s net price change fractional ratio in the cumulative total. NVI is defined as a cumulative total of daily price change fractional ratios for declining volume days only.
We can attach the NVI indicator on to any charts – be it daily, weekly, monthly or intraday. Check the image below to understand how we attached the NVI indicator in HDFC Bank share price chart and what are the default parameters for NVI. The Periods are 255 and we can set the price field open, high, low or close. The default Moving Average Type is simple. However, traders can change the PERIOD and Moving Average Type and Field as per their convenience.
Negative Volume Index Indicator Formula
When today’s volume is less than yesterday’s volume then:
When today’s volume is greater than or equal to yesterday’s volume then:
To calculate the Negative Volume Index, compare the current day’s volume to the previous day’s volume. When today’s volume is greater than yesterday’s volume then today does not qualify as a Negative Volume day. Therefore, today’s net price change is assumed to be zero then it remains unchanged at yesterday’s level. But, if today’s volume is less than yesterday’s volume, then today does qualify as a Negative Volume day.
The Negative Volume Index is a hybrid indicator. It combines inputs from Paul Dysart and Norman Fosback. They designed this indicator for broad market indices and exchange volume. In Negative Volume Index, the counts price changes when volume decreases and discounts price changes when the volume increases. Traders can use this technical indicator on stocks and ETFs, but NVI does not always act as expected. The Negative Volume Index will produce some great bullish/bearish divergence signals with some stocks. Traders should not take decisions only on the basis of NVI, as with all indicators.