PVI (Positive Volume Index)
The Positive Volume Index (PVI) is a technical indicator that focuses on days when volume increases compared to the previous day. It helps identify price movements driven by increased trading activity and can signal potential trend reversals or continuations.
Formula
If Today's Volume > Yesterday's Volume:
PVI = Previous PVI + [((Today's Close - Yesterday's Close) / Yesterday's Close) × Previous PVI]
If Today's Volume ≤ Yesterday's Volume:
PVI = Previous PVI
Where:
Initial PVI value = 1000
How PVI Works
The PVI only changes when volume increases from the previous day. On days with higher volume, the indicator moves in the direction of price change. When volume decreases, the PVI remains unchanged. This selective approach helps traders focus on price movements backed by increased trading activity, which are often considered more significant.
Trading Strategies Using PVI
Strategy Examples
- Use PVI crossovers with its moving average for entry signals
- Monitor PVI divergence with price for potential reversals
- Combine PVI with NVI for comprehensive volume analysis
- Use PVI slope changes for trend confirmation
- Track PVI extremes for overbought/oversold conditions
Support and Resistance
- Historical PVI levels act as support/resistance zones
- PVI moving average creates dynamic support/resistance
- Watch for price reactions at key PVI levels
- Use PVI convergence for S/R confirmation
- Monitor volume clusters at S/R levels
Trend Identification
- Rising PVI indicates bullish smart money flow
- Falling PVI suggests bearish institutional activity
- Compare PVI with price trends for confirmation
- Use PVI rate of change for trend strength
- Monitor PVI patterns for trend continuation/reversal
Advantages and Limitations
Advantages
- Focuses on significant volume changes
- Helps identify smart money movements
- Effective for trend confirmation
- Works well with other indicators
Limitations
- Can lag behind price movements
- May generate false signals in choppy markets
- Requires volume data which isn't always available
- Should not be used in isolation
Best Practices When Using PVI
- Use multiple timeframes to confirm PVI signals
- Combine with other volume indicators for validation
- Wait for PVI trend confirmation before taking positions
- Monitor PVI divergence with price for reversal signals
- Consider overall market conditions when interpreting PVI
- Use PVI with price action analysis for better results
- Set appropriate stop losses based on PVI levels
- Backtest different PVI calculation periods
- Document which PVI patterns work best for your trading style
- Regularly review and adjust your PVI-based strategies