InvestorQ : Can you explain what the negative volume index (NVI) is and how it is used?
Katherine Gonsalves made post

Can you explain what the negative volume index (NVI) is and how it is used?

Rutuja Nigam answered.
2 years ago

One of the basic things that most traders try to constantly figure out is where the real smart money is moving. That is why data on institutional trades, proprietary trades and star trader trades become paramount. One of the most credible measures of the movement of smart money is measured by the negative volume index (NVI). The Negative Volume Index (NVI) is a cumulative indicator and was first developed by Paul Dysart in the early thirties. The NVI effectively uses the change in volume to decide when the smart money is active. The NVI assumes that smart money will produce moves in price that require less volume than the rest of the investment crowd. Again, remember that this is an assumption on which the entire theory is predicated and this assumption could be open to debate.

The basic rule that NVI follow is that the NVI rises on days of positive price change on lower volume. Similarly, the NVI falls on days of negative price change on lower volume, and NVI is unchanged on days of higher volume no matter what the price action. This assumption is at the core of figuring out where the smart money is moving. Again, the NVI is more of a ratification measure than a fundamental trading measure. Once you have a view you can ratify by using the NVI to figure out whether the smart money is entering the stock or leaving the stock. You should be cautious of buying stocks in the latter case.