Negative Volume Index (NVI) – What It Is & How to Trade with It

Negative Volume Index (NVI) – What It Is & How to Trade with It

What is the Negative Volume Index (NVI)?

The Negative Volume Index (NVI) is a technical indicator developed by Paul Dysart and popularized by Norman Fosback. It is based on the idea that smart money (institutional traders) moves the market on low-volume days, while high-volume days are driven by noise and retail traders. The NVI helps traders track price action during low-volume periods to confirm long-term trends.

The NVI formula is:

• If today’s volume is lower than yesterday’s volume:
  NVI = Previous NVI + [(Current Price – Previous Price) / Previous Price] × Previous NVI
• If today’s volume is higher than yesterday’s volume:
  NVI remains unchanged

Where:

• Previous NVI = The prior day’s NVI value.
• Current Price = The most recent closing price.
• Previous Price = The closing price of the previous period.

Key Features of Negative Volume Index

• Focuses on price movement during low-volume days.
• Helps identify smart money accumulation and distribution.
• Often used alongside a 255-day moving average for trend confirmation.

How to Use NVI in Forex Trading

1. Trend Confirmation Strategy

Traders use NVI to confirm long-term trends:

• Bullish Trend: NVI is above its 255-day moving average, suggesting institutional buying.
• Bearish Trend: NVI is below its 255-day moving average, indicating potential weakness.

2. Smart Money Accumulation Strategy

The NVI helps track institutional activity during quiet market periods:

• Buy when: NVI rises steadily while price remains stable or moves slightly higher.
• Sell when: NVI declines while price is struggling to break resistance.

3. NVI Divergence Strategy

Divergence between price and NVI can signal potential trend reversals:

• Bullish Divergence: Price makes a lower low, but NVI forms a higher low (buy signal).
• Bearish Divergence: Price makes a higher high, but NVI forms a lower high (sell signal).

4. NVI with Moving Averages

Pairing NVI with a moving average (e.g., 50 EMA) improves trade accuracy:

• Buy when: NVI is rising, and price is above the 50 EMA.
• Sell when: NVI is falling, and price is below the 50 EMA.

Pros and Cons of Using Negative Volume Index

✅ Pros:

• Helps traders filter out market noise from high-volume days.
• Useful for identifying institutional trading behavior.
• Works well with long-term trend-following strategies.

❌ Cons:

• Less effective in short-term or high-volatility markets.
• Requires confirmation from other indicators for best results.

Final Thoughts

The Negative Volume Index (NVI) is a valuable tool for identifying smart money movements and confirming long-term trends. When combined with moving averages or divergence analysis, NVI enhances trade accuracy and market insight.