The Positive Volume Index (PVI), developed by Norman Fosback, is a means to gauge the strength and direction of a market trend. PVI aims to identify bullish sentiment in the market. It does this by calculating a cumulative index that increases with each trading day where the closing price is higher than the previous day's close and the trading volume is higher as well. This upward movement in the index indicates that there is a growing number of investors buying the asset at higher prices with increasing volume, a clear sign of positive market sentiment and a bullish trend. Combining PVI with moving averages or trend lines can provide a robust framework for making informed trading decisions.
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The steps to calculate the PVI are:
Calculate the Volume Ratio (VR) for each trading day.
VR = (Volume today) / (Volume yesterday)
Calculate the Percentage Price Change (PPC) for each trading day. PPC is the natural logarithm of the closing price today minus the natural logarithm of the closing price yesterday.
PPC = ln(Close today) - ln(Close yesterday)
Start with an initial PVI value (usually set to 1,000 for simplicity).
For each trading day, calculate the PVI using the following formula:
PVI today = PVI yesterday + (VR today * PPC today)
By focusing on days when both price and volume are on the rise, PVI can help traders identify true bullish trends while ignoring short-term fluctuations.
PVI's counterpart, the Negative Volume Index (NVI), does the opposite by tracking days when both the price and volume decline. Together, PVI and NVI provide a comprehensive view of market sentiment, allowing investors to gauge the strength of both bullish and bearish trends.
PVI is not suitable for all securities and lacks widespread adoption, making it less accessible for traders. It relies on historical data and might not perform well in rapidly changing market conditions or under market manipulation. Investors should consider these limitations and use PVI in conjunction with other indicators for a more comprehensive analysis.