Negative Volume Index (NVI)

Overview

The Negative Volume Index (NVI) is a technical indicator that tracks price changes on days when trading volume decreases. It was developed to help separate price moves driven by lower-volume (often considered “smart money” or institutional flows) from moves driven by higher-volume activity.

How NVI Works

• NVI only updates on days when current volume is lower than the previous day’s volume.
• On higher-volume days, the NVI remains unchanged.
• The idea is that on down-volume days, price changes may reflect the behavior of informed or mainstream investors, while up-volume days often include broader market participation and noise.

Calculation

Use the following recursive rule:

• If Volume_t < Volume_{t-1}:
  NVI_t = NVI_{t-1} × (1 + (P_t − P_{t-1}) / P_{t-1})
• If Volume_t ≥ Volume_{t-1}:
  NVI_t = NVI_{t-1}

Where:
– NVI_t = NVI at time t
– P_t = price or index level at time t

Practical notes:
– Choose an arbitrary starting value for NVI (common conventions use 100 or 1,000).
– The indicator is plotted as a cumulative line, similar to other trendlines.

Simple example:
– Start NVI_0 = 1000.
– If yesterday’s price was 50 and today’s price is 51 (a 2% gain) and today’s volume is lower than yesterday’s, then:
NVI_today = 1000 × (1 + 0.02) = 1,020.
– If volume is higher, NVI stays 1,000.

Using NVI with the Positive Volume Index (PVI)

• PVI is the counterpart that updates only on days when volume increases.
• Comparing NVI and PVI helps distinguish whether price trends are driven more by down-volume (NVI) or up-volume (PVI) days.
• Traders often monitor both to identify which type of market participant is primarily influencing price.

Interpretation and Signals

• Rising NVI: suggests price advances are occurring on lower-volume days, potentially indicating accumulation by more informed investors.
• Falling NVI: suggests price declines are occurring on lower-volume days, possibly signaling distribution.
• Common practice: compare NVI to its long-term moving average (e.g., a 200–255 day MA). Bullish signal when NVI is above its MA; bearish when below. (This is a rule of thumb used by some technical analysts.)

Limitations and Practical Tips

• NVI is a lagging indicator and relies on volume data quality.
• It should not be used alone; combine with price action, volume analysis, and other indicators.
• Market structure, exchange volume reporting, and instrument liquidity can affect NVI usefulness.
• Backtest any NVI-based rules on the specific market and timeframe you trade.

Conclusion

The Negative Volume Index isolates price movement on low-volume days to highlight potential “smart money” behavior. When used alongside the Positive Volume Index and other analysis tools, NVI can offer insight into whether price trends are being driven by lower-volume or higher-volume trading — but like all indicators, it has limits and works best as part of a broader trading toolkit.