The Positive Volume Index (PVI) is an indicator that uses trading volume (total
number of transactions in shares or contracts) as a way of forecasting trend activity.
Some days see trading activity where volume shows a significant increase (or
decrease) from the previous trading session and these changes can give investors
an indication of where the “smart” money is going and when the “herd”
is finally catching up.
Positive Volume (shown in the PVI) occurs when volume is greater than what was seen
during the previous day. In contrast, the Negative Volume Index (NVI) tracks
data showing a decrease in volume when compared to transactions seen during the
previous session. This indicator is essentially a way of monitoring market
behavior through total trading activity in a given asset (total volume of trades)
and this allows investors to spot potential turning points as trends start to become
As trading volume increases, we can begin to assume that inexperienced traders are
starting to enter into the market. At this stage, rumors have circulated, newspaper
headlines have been written, and the majority of the market participants start to
enter into positions to catch the latest move. The problem with this mindset is
that prices can only go up (or down) for a finite amount of time. Once the majority
of market participants have entered into position, there is no one left to buy (or
sell) the asset. This occurrence is one of the best indications that a trend is
on the verge of a reversal and one of the easiest ways to spot this phenomenon is
by using the PVI.
The PVI was created in 1936 by Paul Dystart, who based the indicator on the idea
that the level of trading volume is the main driver in the momentum of stock prices.
Dystart’s models were later built on by Norman Fosback in his book Stock Market
Logic, which added a base index level for the cumulative count (100 is the most
commonly used base) and arrived at the daily changes in percentages rather than
a simple difference in closing values. Finally, the buy and sell signals are generated,
according to Fosback, based on the indicator’s relationship to its longer
term moving average.
Fosback’s models are the ones most commonly used in the trading community
today as they are generally believed to more fully express the concept that as volume
increases, unification is building in the trading community. Since the indicator
looks to capitalize on the lack of sophistication seen in the majority of the marketplace,
Fosback’s PVI will enable traders identify instances when this majority (traders
who are late in forecasting the underlying momentum in an asset) are entering into
This surge in volume is then interpreted as a red flag, as most of the market is
now committed to a position. The lack of available participants (to push prices
further) gives a contrarian signal that the trend is in danger of reversing. For
this reason, the PVI is typically thought of as a contrarian indicator. (Some traders
argue this point, however, as the PVI often moves in the same direction as the actual
So, if the indicator can show investors when to exit a position (as the “herd”
makes its way into the trend), the question then becomes: How to we spot acceptable
entry points? To determine this, the PVI uses the opposite occurrence, the slower
trading days (with limited trading volume) to identify the movement of “smart”
money into your chosen asset (stocks, commodities, or currencies). This decline
in trading activity shows us that the inexperienced majority is on the sidelines
and the shrewd investors are starting to build new positions.