To understand volume analysis, it is important to have indicators that can help the investors to measure the volume. Most of the technical analysts use two of the important volume indicators, the Positive Volume Index (PVI) and the Negative Volume Index (NVI).
What is a Positive Volume Index?
The positive volume index is used to measure the positive impact or increase in the trading volume. Here, the trading volume is compared with the previous day to check if there is any increase. If there is an increase, the PVI (Positive Volume Index) is adjusted.
To calculate PVI,
PVI= PVIprevious + ( (CPtoday −CPyesterday) / CPyesterday )∗PVIprevious
Here,
PVI = Positive Volume Index
PVIprevious = Positive Volume Index of the previous day
CPtoday = Closing Price of today
CPyesterday = Closing Price of yesterday
The change in the positive volume index signifies the prices are being influenced by heavy volumes. This means the increase or decrease in PVI is due to trading in heavy volumes such as buying and selling in huge volumes.
What is a Negative Volume Index?
The negative volume index is used to measure the negative impact or decrease in the trading volume. Here, the trading volume is compared with the previous day to check if there is any decrease. If there is a decrease, the NVI (Negative Volume Index) is adjusted.
To calculate the NVI,
NVI= NVIprevious + ( (CPtoday −CPyesterday) / CPyesterday )∗NVIprevious
Here,
NVI = Negative Volume Index
NVIprevious = Negative Volume Index of the previous day
CPtoday = Closing Price today
CPyesterday = Closing Price yesterday
The change in the negative volume index signifies the prices are being influenced by lesser volumes. This means the increase or decrease in the volume is caused by the trade or buying/selling of lesser volumes.
Summary
Volume analysis is one of the important metrics that help investors understand the market trend from a broader perspective. It is defined as the number of trade exchanges such as shares and contracts during a specific time period. There are two most popular and widely used volume indicators: PVI (Positive Volume Index) and NVI (Negative Volume Index) that help in volume analysis. The positive volume index is used to measure the positive impact or increase in the trading volume. At the same time, the NVI is used to measure the negative impact or decrease in the trading volume.
