What is NVI?

Buying stocks without prior knowledge of the market is not called investing but speculating. When you speculate, you realize losses. You may monitor stock for a month, where its price has been rising every day, but you can see the price fall to the lowest levels in a matter of days. Without knowing the ideal entry point, you can never know where the stock price is headed. What can you do in this case? Stop investing?

Investing in stocks is one of the most effective ways of wealth multiplication. The Indian stock market has provided the highest return on investment consistently in the long term. However, the most important thing that is needed to be successful in the stock market is financial knowledge. Among numerous techniques that are vital to analyze and evaluate the market, technical analysis is supreme.

What is Technical Analysis?

Technical analysis is the study of chart patterns, graphs, and diagrams on a screen. The idea is to understand price and volume trends and pick stocks accordingly. Technical analysis is based on the premise that historical price trends tend to repeat over time. In technical analysis, you sit with historical stock charts, look at price and volume data, and then plot various trends. Based on past wisdom, you find patterns to trade for the future.

What is the Negative Volume Index (NVI)?

Before diving deep into the Negative Volume Index (NVI), you should understand the effect of the trading volume. If the trading volume of a stock is high and the price is rising, it means that there is high demand for the stock and buyers are buying it, indicating a possible further rise in its price. On the other hand, if the trading volume of a stock is high, but its price is falling, it means investors are selling the stock, indicating that the price can go even lower.

Let’s now move on to the Negative Volume Index (NVI).

The Negative Volume Index (NVI) is a technical indicator used to identify the market trend. It is a cumulative indicator, meaning that its current values will be used in future values for a previous period. The central idea behind the Negative Volume Index (NVI) is to track smart money and understand the market trend. If the trading value has fallen, but the trend is continuing, it means that professional investors still see potential in the market, and the current trend may continue.

The Negative Volume Index (NVI) believes that the rise in the trading volume is because of not-so-smart investors who invest without any prior research. Hence, when the trading volume is low, the Negative Volume Index (NVI) allows investors to understand when the current trend is strong and will continue in an upward trend.

How to calculate Negative Volume Index (NVI)?

There is a detailed formula you can use to calculate Negative Volume Index (NVI). The formula is listed below:

NVI (t) = (P(t) - P(t)-1) x NVI(t)-1/ P(t)-1

• NVI (t) = Negative Volume Index at time t
• P(t) = Price or the index level at time t

You can use the Negative Volume Index (NVI) formula if the volume goes down during a specific period. You can use today’s price calculation as the previous Negative Volume Index (NVI) if there is no previous Negative Volume Index (NVI) calculation. If today’s trading volume is higher or equal to the trading volume for yesterday, the Negative Volume Index (NVI) remains unchanged.

Limitations of Negative Volume Index (NVI)

Investors need to exercise caution as the Negative Volume Index (NVI) going below the long-term moving average doesn’t mean that the market has become bearish. On the contrary, it means that the probability of the market being bullish has fallen below 50%. Furthermore, the Negative Volume Index (NVI) is exposed to whipsaws. This is when numerous crossovers happen quickly. It makes it tough for investors to understand the market trend and the price movement. Hence, it is always better to look at the PVI and only trade when both indices provide similar signals.

Final Words

The Negative Volume Index (NVI) is a more predictable one when compared to the Positive Volume Index (PVI), making it more reliable. It combines both the trading volume and price to track smart and not-so-smart money. The Negative Volume Index (NVI) works well with stocks and can offer valuable insight for investors looking to understand the current market trend. However, the Negative Volume Index (NVI) should not be used alone but accompanied by other technical indicators for better market signals.