What is PVI?

A common question among new investors regarding the stock market is: why do some investors say they have lost a huge sum of money while investing, while others have garnered immense wealth by investing in stocks?

It is true that the stock market is volatile and can result in a stock price falling. However, market volatility is one of the most common factors in the stock market. Professional traders consider volatility as one of the best entry points to buy an undervalued stock. They think if the prices are down, but the stock has potential, it can only go up from the current level. This allows them to buy cheap and realize huge profits when the stock reaches a new high. In this case, new investors are always intrigued to know the secret of professional investors that allows them to know about market trends and analyze a stock to know when to buy it.

The secret is Technical Analysis and the various indicators that are used during the process. One of the indicators is called Positive Volume Index (PVI) and is vital to the success of professional investors to make hefty profits.

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 to trade for the future.

What are Technical Indicators?

Technical indicators are mathematical computations plotted as lines on a price chart that aid traders in identifying certain signs and trends in the stock market. They are simply a set of tools applied to a trading chart to demystify the market and make a clearer analysis. There are numerous technical indicators used by investors such as Moving Averages, One balance volume, Positive Volume Index (PVI), etc. These indicators are used together by investors to execute the process of technical analysis for a specific stock, index, or benchmark.

What is the Positive Volume Index (PVI)?

Before diving deep into the Positive Volume Index (PVI) definition, 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, 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 Positive Volume Index (PVI).

The Positive Volume Index (PVI) is a stock market indicator that investors use in the process of technical analysis. The central idea behind Positive Volume Index (PVI) is to analyze and understand the price changes in the market based on the prevailing trading volumes. In the Positive

Volume Index (PVI) process, a detailed comparison is made between the current trading volume and the past trading volume at a specific point in time. Factoring these trading volume comparisons, the Positive Volume Index (PVI) provides details about the price movement. Investors use these price movements to take positions in the stock market or adjust their current positions to mitigate losses. Usually, the Positive Volume Index (PVI) is calculated daily, making it an effective and widely used tool by intraday traders.

The Positive Volume Index (PVI) is seldom used alone but is seen against other technical indicators such as Moving Averages, Relative Strength Index, etc.

How to calculate Positive Volume Index (PVI)?

The Positive Volume Index (PVI) is relatively easy to calculate. You just have to put some commonly available information in the below-mentioned formula to calculate Positive Volume Index (PVI).

• PVI is a positive volume Index
• PPV1 is the previous positive volume index
• TCP is the closing price for today
• YCP is the closing price of yesterday

You can use the Positive Volume Index (PVI) formula if the price trading volume is higher today than the previous day. You can use today’s price calculation as the previous Positive Volume Index (PVI) if there is no previous Positive Volume Index (PVI) calculation. If today’s trading volume is lower or equal to the trading volume for yesterday, the Positive Volume Index (PVI) remains unchanged.

Limitations of Positive Volume Index (PVI)

Here are the limitations of the Positive Volume Index (PVI):

• As the Positive Volume Index (PVI) typically tracks the crowd, it factors in the ‘not-smart-money’, forcing it to be used alongside the Negative Volume Index.
• The Positive Volume Index (PVI) is exposed to whipsaws. This is a phenomenon when numerous crossovers happen quickly. It makes it tough for investors to understand the market trend and the price movement.

Final Word

Paul L Dysart developed the Positive Volume Index (PVI) in 1936. Now it is widely used by almost every professional investor to understand the price movement. According to the Positive Volume Index (PVI), if it is below the one-year average, it indicates that there is a 67% chance that the market can become bearish. If the Positive Volume Index (PVI) is below the one-year average, the change of a bear market falls to 21%.