Positive Volume Index Definition
The positive volume index (PVI) is an indicator which tracks volume as it increases from the previous day. It was first introduced by Norman Fosback in the book Stock Market Logic. The belief behind the indicator is that as volume increases, the investment community is unified with the current direction of the market. As this indicator shows the actions of the majority, it is often used as a contrarian indicator. Many professional traders utilize the PVI to assess what the smart money is doing in the market. The assumption is that on quiet days, large institutions are active in the market.
PVI Trading Signals
The most popular signal for the positive volume index is when the index drops below its 1 year moving average. Fosback believes that when this occurs, there is a 67% probability that a bear market is fast approaching.
Postive Volume Index Formula
If the current volume is greater than the previous day, then the formula for the PVI is as follows:
PVI = Previous PVI + ((Close - Previous Close)/Previous Close) * Previous PVI))
Conversely, if the current day's volume is less than the previous day's volume, then the formula for Positive Volume Index is as:
PVI = Previous PVI