Positive Volume Index: Is It an Indicator of a Bull Market?

Before talking about the Positive Volume Index (PVI), first a few words about volume in general. 

Simply put, the volume shows how many crypto assets, stock shares, or other financial units are traded over a specific period, which could be a day, a week, a month, or any other time frame.

It’s up to you which interval to choose for your analysis based on your trading strategy. Speaking of that, whether you use a short-term or long-term strategy, analyzing volume can help make sense of traders’ interest in the asset as well as its liquidity.

Reading volume is a part of both, technical and fundamental analysis as it helps decode charts. Volume is typically displayed at the bottom part of graphics.  

Related: How are trading volumes useful in cryptocurrency analysis?

For example, here’s the price chart of Bitcoin for a month (from September to October) on CoinGecko where the gray bars at the bottom indicate volume. 

Bitcoin trading price and volume for the month from September to October. The price is displayed by a green line and the volume is in a grey area at the bottom. Source: coingecko.com

Volume changes can confirm trends, breakouts, and market strength among other metrics. 

If you want to learn more about technical and fundamental analysis and understand how volume can be analyzed there, check out our article: «Fundamental vs.Technical Analysis». Meanwhile, we’ll move on to the main subject of this article, the Positive Value Index. 

What Is the Positive Value Index (PVI)?

The Positive Volume Index (PVI) is a trading indicator that focuses on periods of rising volume. Traders typically compare the trading volume of the current day with that of the previous day to measure its increase.

What is the formula of PVI? 

To calculate the PVI, you first need to analyze the volume change. In the stock market, traders usually use the closing prices of the day for their calculations. 

In contrast, crypto markets operate 24/7, so there are no official closing prices. But that’s not an issue: you can pick a specific time frame for calculations. For example, that could be midnight or any hour that you usually trade. 

When you have the prices to compare, go ahead and calculate the price change by subtracting yesterday’s closing price from today’s closing price and dividing the result by yesterday’s closing price.
In the formula, it looks like this: 

This helps you understand the relative change in price as a percentage to compare the price movement.

To begin with your PVI calculations, you need a starting point. 

And that starting point is Yesterday’s PVI. 

In practice, traders pick a set value (usually 1000) for their first day of calculation. If the trading volume decreases compared to the previous day, the PVI remains unchanged.

Here’s the full formula of the Positive Volume Index:

Why Calculate PVI and Do You Need to Do It Yourself? 

The concept of PVI suggests that large institutional investors tend to trade when market volume is low. In contrast, crowd or uninformed investors often make emotional purchases on days when the market is more active. For this reason, “not-so-smart” money is believed to be most active on higher volume days.

In crypto, there's a term called “buying the dip,” which refers to large investors adding cryptocurrency to their portfolios when trading volume and prices are low. As El Salvador's president, Nayib Bukele once said “Thank you for selling cheap.”

The Positive Volume Index was introduced in Stock Market Logic by author and financial expert Norman Fosback, and published in 1976. Fosback used the PVI to assess the market’s reaction to volume changes. Along with other metrics, the PVI can signal bearish or bullish market trends.

What can PVI tell you? 

• High PVI: Suggests that the asset’s price is rising on increasing volume, indicating strong buying interest and potentially bullish market sentiment. This may mean that the upward price trend is likely to continue as more investors actively participate.

• Low PVI: Indicates that the price is rising but on declining volume, suggesting that fewer investors are supporting the price increase. This could signal a weakening trend and may serve as a warning sign of a potential reversal or slowdown.

• Flat PVI: Means there is little to no significant change in price relative to volume. This often reflects market indecision, consolidation, or a lack of strong interest from buyers or sellers, signaling a possible upcoming breakout or a prolonged sideways trend.

So, how to figure out the PVI easily? 

The PVI is not as commonly accessible on trading platforms as metrics like the Fear & Greed Index or Moving Averages. This is because it’s used in specific trading strategies and can be complex for beginners to understand.

To obtain the Positive Volume Index, you can use Excel, custom scripts on trading platforms, or look for apps and portfolios that track the index.

Example of Positive Volume Index (PVI) in Crypto Trading

Consider Bitcoin (BTC) when its price is around $60,000:

1. Day 1: BTC starts at $59,500 with a volume of 8,000 BTC, closing at $60,000. Initial PVI = 1000.
2. Day 2: The price rises to $60,500, and volume increases to 10,000 BTC. PVI goes up to 1100.
3. Day 3: Bitcoin reaches $61,000 with a volume of 12,000 BTC. PVI rises to 1200.
4. Day 4: The price drops slightly to $60,800, but volume stays at 11,000 BTC. PVI remains at 1200.
5. Day 5: Bitcoin bounces back to $61,500, with volume rising to 15,000 BTC. PVI increases to 1300.

What It Means: The rising PVI shows strong buying interest in Bitcoin around $60,000, primarily driven by retail traders. This suggests positive market sentiment that traders can use to make decisions.

Why Can’t You Rely on the PVI Only? 

Yes, the PVI can help you in market analytics, but it has its limitations. Speaking of some: 

• Not ideal for low-volume assets: The PVI works best for assets that experience significant volume fluctuations. For illiquid stocks or other low-volume assets, the PVI may produce misleading signals.

• Potential for false signals: In volatile markets, the PVI can generate false signals. It is essential to cross-validate with other tools to ensure accuracy.

Like many technical indicators, the PVI should not be used in isolation as a buy or sell signal. It is best used as part of a broader strategy that includes other indicators and market analysis.

What Other Indicators Can Be Used Along With the PVI? 

Usually, the Positive Volume Index is used together with the Negative Volume Index (NVI) to help find trading possibilities. The NVI focuses on days when trading activity is low. These two indicators can tell you when smart money is more active in the market and when no-so-smart money is. 
For example, the PVI’s decline in times when the NVI steps in can be a bullish trend telling that large investors are active. 

Another popular indicator to use with the PVI is the Relative Strength Index or RSI. This indicator measures the speed and change of price movements, essentially showing whether the asset is overbought or oversold. 

When combined with PVI, RSI can show whether a strong price movement is genuinely supported by volume or if it doesn’t have strong fundamentals. 

And, let’s not forget about Moving Averages, which show the average price of the asset over a specific time interval. When paired with PVI, moving averages can help you spot long-term trends and possible reversals. 

Related: What is the RSI indicator?

Use or Not to Use the PVI in Your Trading Strategy? 

The PVI may be a useful indicator for you if you’re an active trader using technical analysis for volume and price relationships. Looking at the metrics and market performance in different conditions can help evaluate price movements over time. 

You can spot red flags in the market and reveal potential scams and manipulations by analyzing the PVI. For example, if a cryptocurrency sees a big price change without an increase in volume, that can point to insider trading and pump-and-dump schemes. 

Despite its benefits, you may not need to include PVI in your trading strategy if you prefer HODL-ing or trading casually without getting into technical analysis. Also, if you’re a beginner in trading, you’d need to focus on basic concepts first, which include understanding risk management and emotional trading. 

The Main Question: Is the PVI an Indicator of a Bull Market

In some trading scenarios, the PVI can be an indicator of a bull market. Say, the index is high in the last 7 days along with rising prices. That’s a strong sign of bullish sentiment. 

However, in other scenarios, the PVI may not provide a certain picture. Imagine a case where the PVI is unstable while the market doesn’t show any strong upward or downward movement. Here, the PVI may not be enough to make conclusions.  

FAQ

1. What Is the Positive Volume Index (PVI)?

The Positive Volume Index is a trading indicator that zooms in on periods when the volume is rising.

2. How to Decide If You Need to Use the PVI? 

The PVI may be a useful indicator for you if you’re an active trader using technical analysis. However, you won’t need it if you prefer HODLing or casual investing. 

3. How can the PVI Signal Market Red Flags? 

PVI can reveal potential scams or manipulations in the market by indicating large price changes without corresponding volume increases, which may suggest insider trading or pump-and-dump schemes.

4. What Market Trends Can You Spot With the PVI? 

Analyzing the PVI helps traders identify when smart money (large institutions) is active compared to when not-so-smart money (uninformed participants) is influencing price movements. A rising PVI signals smart money buying and bullish sentiment, while a declining PVI during rising prices may suggest a potential market reversal.