In order to calculate Trade Volume Index, one must first determine whether prices
are accumulating or distributing. In order to do so, use the following formula:
Change = Price - Last price
MTV = Minimum Tick Value
- If change is greater than MTV, then Direction = Accumulate.
- If change is
less than -MTV, then Direction = Distribute.
- If change is less than or equal
to MTV and change is greater than or equal to -MTV, then Direction = Last Direction.
After determining the trend, one can calculate the Trade Volume Index by using the
- If direction is accumulate then: TVI = TVI + Today's Volume
- If Direction
is Distribute then: TVI = Previous TVI – Today’s Volume
The Trade Volume Index is works on the Intraday Tick Prices to determine direction
and speed of a trend. Similar in style to On-Balance Volume Method, the TVI identifies
whether a security is accumulated or distributed. Here accumulated means Purchased
and Distributed signifies a selling trend. The main difference between the two methods
i.e. Trade Volume Index and On Balance Volume is that, OBV uses end of day data
to calculate price trends whereas TVI utilizes the intraday prices data to predict
the trend. OBV fails to predict trend when prices don’t change much from their
previous day close. This designs a flat level of both support and resistance on
the chart. On the other hand, TVI holds good even in slightly changing prices. Reason
behind it is that, first of all TVI determines whether a security is bought or sold.
After determining it, the next step is to determine the direction of trend i.e.
up or down. If the TVI is going up, it means transactions are conducted on asking
price because buyers are accumulating price. On the other hand, if TVI goes down,
it means the stock is traded on Bid Price because traders are distributing that
particular security. Similarly, when prices trend up flat on resistance, but the
TVI is rising, prices tend to breakout in upside direction. Contrarily, if TVI is
falling with flat resistance level, the prices tend to fall below support level.
Advantages of Trade Volume Index
- Trade Volume Index is tailor-made for Day Traders. Reason behind it is that, TVI
uses Intraday Price data to determine trend direction of a security.
- TVI indicates
highlights every change in the Price of a security and can easily predict the trend
of Investors i.e. Purchasing or Selling.
- Trade Volume Index is far better than
OBO because it holds good even when the prices don’t deviate significantly
from their previous close.
Disadvantages of Trade Volume Index
- The formula of Trade Volume Index heavily relies on Past Data including Previous
Trade Volume Index. Although day end prices are most important, Trade Volume Index
doesn’t consider end of day data in its calculation.
- Trade Volume Index
holds good only when its assumption is fulfilled. But, in majority of cases, markets
tend to disagree with the assumption of TVI.