NVI (Negative Volume Index)
The Negative Volume Index (NVI) is a cumulative indicator that focuses on days when volume decreases from the previous day. It is based on the premise that smart money is more active on lower volume days, while the crowd trades on higher volume days.
Formula
If Today's Volume < Yesterday's Volume:
NVI = Previous NVI + (((Today's Close - Yesterday's Close) / Yesterday's Close) × Previous NVI)
If Today's Volume ≥ Yesterday's Volume:
NVI = Previous NVI
How NVI Works
The NVI only changes when volume decreases compared to the previous day. On days when volume increases, the NVI remains unchanged. A rising NVI suggests smart money is buying, while a falling NVI indicates smart money is selling. The indicator is often used with its 255-day moving average, where crossovers can signal major trend changes.
Trading Strategies Using NVI
Strategy Examples
- Trade NVI crossovers of its 255-day moving average
- Use NVI divergence with price for confirmation
- Combine NVI with volume analysis for better signals
- Monitor NVI trends during market consolidation
- Use NVI for market timing decisions
Support and Resistance Strategy
- Use NVI levels as dynamic support/resistance zones
- Look for NVI convergence at key price levels
- Combine with price action at support/resistance
- Monitor NVI behavior at historical price levels
- Use NVI to confirm breakout strength
Trend Identification
- Rising NVI above 255-MA indicates bullish trend
- Falling NVI below 255-MA suggests bearish trend
- NVI trend strength correlates with smart money flow
- Use NVI slope changes for trend reversal signals
- Compare NVI trends across multiple timeframes
Advantages and Limitations
Advantages
- Helps identify smart money movements
- Effective for trend confirmation
- Good for filtering out market noise
- Works well with other indicators
Limitations
- Can lag behind price movements
- May give false signals in choppy markets
- Requires other indicators for confirmation
- Not suitable for short-term trading
Best Practices When Using NVI
- Use multiple timeframes to confirm NVI signals
- Combine with volume analysis and other technical indicators
- Wait for clear NVI trend changes before taking positions
- Monitor NVI behavior during low volume periods
- Use NVI to identify potential institutional activity
- Consider overall market conditions when interpreting NVI
- Look for confluence between NVI and price action
- Backtest different NVI calculation periods
- Document which NVI patterns work best for your trading style
- Regularly review and optimize your NVI-based strategies