Price Volume Trend

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Introduction

Although there is no pioneer of Price and Volume Trend, it is believed that it has evolved out of OBV Indicator which was initiated by Joseph E. Granville. Price Volume Trend and Volume Price Trend are interchangeably used to describe this technical analysis indicator. The main purpose of Price Volume Trend is to develop a relationship between price and volume. Price Volume Trend relies on an operating accumulative volume that makes an addition or subtraction of a predetermined multiple of proportional change in a stock's prevailing trend and current volume, relying upon direction of their trend i.e. upward or downward. Similar in working to Price Volume Trend Indicator, the On-Balance Volume Indicator also uses cumulative sum of volume that is percentage of changes in end of day prices. The difference between the two is that, OBV sums all positive end of day values and subtracts all negative closing values whereas PVT only adds or subtracts a proportion of the day end volume. The amount of proportion is dependent upon the size of difference between opening and closing volumes.

Primarily, PVT is used by traders for calculating the difference between demand and supply of a particular security. Relative Demand or Supply for a particular security is denoted by the proportional change in a security’s price trend. On the other hand, Volume gives an indication of the force exerted by traders in a particular direction that may be upward or downward. Traders believe that PVT represents a more accurate and precise picture of Volume Size and Direction. Reason behind it is that, OBV adds positive closing values and subtracts negative values regardless of their size of change. Contrarily, if price changes considerably, PVT will add a significant part of volume to PVT Value and vice versa. Price Volume Trend is frequently used by traders to determine the strength of a trend in the market.

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Calculation

Price Volume Trend is a collection of Price Movements along with the volume of trading. The formula to calculate PVT is as under:

 [ [ (Close - Yesterday's close)  / (Yesterday's close) ] * Volume ] + Yesterday's PVT

In the above formula Price Volume Trend is determined by multiplying each day’s volume by the Proportional change of price from its previous close and combining all values to get a cumulative sum. In order to calculate PVT for a number of days, use the following formula:

PVT = [ ( Ct - Ct-1 ) * Vt ] + ...... + [ ( Ct-n+2 - Ct-n+1 ) * Vt-n+1 ]

Where,
Ct = Today’s Closing Price,
Vt = Today’s Volume,
n = Predetermined Period. It can vary from '1' to '500'.

Specifications

PVT is a very common indicator, used by traders to determine future price movements. The Specifics of PVT and Accumulation/Distribution Indicators like Trade Volume Index are same in nature. PVT is able to predict future prices more accurately and precisely because of the fact that it uses a proportional change rather than whole amount of change whether positive or negative. On the other hand, other indicators use whole value of change in Volume from previous close to determine future price. That’s why PVT is able to predict a clearer picture of the outflow of money for a particular security.

The Output of PVT can be easily drawn on a line chart. The PVT starts decreasing when money outflow is in process. This will happen when price will be falling and volume (selling volume) will be rising. Similarly, PVT starts rising if money is flowing in the market. This will happen when Prices and Volume are increasing side by side. Rising PVT also signifies that new money is flowing into the market. Ultimately, PVT will level off, signaling an end to a prevailing trend in the near future. Similarly, decreasing PVT implies money is flowing out of the market. If PVT starts decreasing while moving in an upward trend, it indicates an underlying downward trend and vice versa.

If we setup a Simple Moving Average on Line Chart along with Price Volume Trend, the points of intersections can be referred to as trade signals. If Price Volume Trend touches Simple Moving Average from below, this is termed as Buy Signal. Contrarily, if PVT touches Simple Moving Average from above, it indicates a Sell Signal. Divergence among the two is considered as a possible change in the direction of the prevailing trend i.e. upward or downward. PVT is highly regarded for detecting price reversals and Pullbacks in the near future. Reason behind it is that, PVT is more sensitive to price movements as compared to Other Similar Indicators including OBV and Accumulation/Distribution line.

Advantages of Price Volume Trend

  1. Price Volume Trend is more accurate and exact as compared to On-Balance Volume Indicator in predicting future price movements. Reason behind it is that, PVT determines the proportional weight of each change. OBV, regardless of the amount of change adds all incremental changes and subtracts all negative changes in price of a security.
  2. The PVT is indicates a precise picture of money inflow and outflow for a particular currency during a specified period of time. Not only this, the PVT also shows a Volume Line as a tool for displaying the proportional changes in a particular currency pair’s price trend.

Disadvantages of Price Volume Trend

  1. The biggest demerit of PVT is that, it doesn’t exhibit trade signals. The trader must use another indicator like Simple Moving Average to determine right time to buy or sell.