Trade Volume Index

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Introduction

Trade Volume Index determines whether a security is bought or sold by calculating the quantity of Cash in Flow and Cash out Flow for that particular security during a specified period of time. Contrary to many technical indicators, the Trade Volume Index is determined on the basis of Intraday Price Values. The Indicator is based on the assumption that buying pressure rises when Price approaches Ask Price and Selling Pressure rises when Price nears the Bid Price. The outcome of Trade Volume Index is Accumulation (Purchase) or Distribution (Sale) trend for an underlying security. TVI is the short form of Trade Volume Index. TVI uses Volume as well as Price in its formula. As its name signifies, TVI indicates the amount of a security purchased or sold.  The Day Traders frequently uses TVI because it uses Intraday Price Data. This doesn’t mean at all that other traders don’t use or prefer TVI over other Technical Indicators.

In order to fully understand the concept of Trade Volume Index, one must understand the concept of Minimum Tick Value. Minimum Tick Value is a predetermined figure that is utilized by traders to make a comparison between various rates of change. It will help in determining the pattern prevailing in the market i.e. Accumulation or Distribution. The change signifies range of price movement i.e. the difference between extreme prices since last change in direction. If the change is greater than Minimum Tick Value, then the Indicator would signify an accumulation trend. But, if the change is below Minimum Tick Value, then the Tool indicates a Distribution Trend.

Similar Technical Indicators include On-Balance Volume Indicator. The Main difference between the two is that OBV Technical Indicator uses day end data of volume associated to each transaction like Day’s Closing Figure of Volume which attributes to whole day transactions. Long Traders opt for other indicators rather than TVI because they are less concerned with the Intraday Price Data. The values of TVI oscillate around the neutral line. If the value of TVI is above neutral line, it indicates an overall buying pressure whereas if value of TVI is below neutral line, it indicates a selling pressure.

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Calculation

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 following formula:

  • If direction is accumulate then: TVI = TVI + Today's Volume
  • If Direction is Distribute then: TVI = Previous TVI – Today’s Volume

Specifications

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

  1. 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.
  2. TVI indicates highlights every change in the Price of a security and can easily predict the trend of Investors i.e. Purchasing or Selling.
  3. 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

  1. 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.
  2. 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.