Pine Script Negative Volume Index (NVI)

What is the Negative Volume Index (NVI)?

The Negative Volume Index (NVI) is a cumulative momentum indicator that focuses on periods of decreasing volume. Developed by Paul Dysart and popularized by Norman Fosback, the underlying theory behind NVI is that "smart money" (institutional or well-informed investors) tends to operate on low-volume days, while "uninformed money" operates on high-volume days. Therefore, changes in price action on low-volume days are considered more significant than changes on high-volume days.

The NVI essentially tracks a cumulative sum that is adjusted only when volume decreases from the previous day. If volume decreases, the NVI is adjusted by the percentage change in price. If volume increases, the NVI remains unchanged. A rising NVI suggests smart money is accumulating an asset, even on low volume, which often precedes price increases. A falling NVI suggests smart money is distributing. NVI is primarily used to:

• Identify divergences: When price and NVI move in opposite directions, it can signal an impending trend reversal.
• Confirm price trends: NVI's trend confirms the underlying strength of a price trend, particularly on low-volume days.
• Gauge long-term sentiment: It's often used as a long-term indicator for the overall market or individual stocks.

In Pine Script, NVI offers a distinctive way to analyze market sentiment by focusing on the less obvious, but often more telling, periods of trading activity.

Components and Calculation

The calculation of the Negative Volume Index is cumulative and depends on the relationship between current and previous volume:

1. Initialize NVI: The starting value of NVI is usually set to 1000 (or some other arbitrary base value) to provide a convenient reference point.
2. Conditional Update: For each period:
   • If Current Volume < Previous Volume: `NVI = Previous NVI + (Previous NVI * ((Close - Previous Close) / Previous Close))` Essentially, `NVI = Previous NVI * (1 + Price Percentage Change)` * Handle `Previous Close == 0` to avoid division by zero.
   • If Current Volume > Previous Volume: `NVI = Previous NVI` (NVI remains unchanged)
   • If Current Volume == Previous Volume: `NVI = Previous NVI` (NVI remains unchanged)

NVI is often smoothed with an Exponential Moving Average (EMA) (e.g., 255-period EMA for annual trend) to reduce noise and identify its long-term trend.

Basic Negative Volume Index (NVI) Implementation in Pine Script

Pine Script v5 provides a built-in function `ta.nvi()` for calculating the Negative Volume Index.

//@version=5
indicator("My Negative Volume Index (NVI)", overlay=false) // overlay=false to plot in a separate pane

// Input for NVI starting value (arbitrary, but common to start at 1000)
nviStartValue = input.float(1000, title="NVI Start Value")

// Calculate NVI using the built-in function
// ta.nvi() uses 'close' for price comparison and 'volume' for volume comparison
nviValue = ta.nvi(nviStartValue, close, volume)

// Plot the NVI line
plot(nviValue, title="NVI", color=color.blue, linewidth=2)

// Optional: Add a Moving Average of NVI (often a long-term EMA) as a signal line
// A common length for the NVI MA is 255 (representing roughly a year of trading days)
nviMALength = input.int(255, title="NVI MA Length", minval=1)
nviMA = ta.ema(nviValue, nviMALength)

// Plot the NVI Moving Average
plot(nviMA, title="NVI MA", color=color.orange, linewidth=1)

Practical NVI Trading Strategies

1. NVI and Moving Average Crossovers (Trend Confirmation)

The most common strategy with NVI involves comparing it to its own moving average (often a long-term EMA like a 255-period). This helps confirm the direction of the "smart money" trend.

• Bullish Signal: NVI crosses above its moving average. This suggests that smart money is accumulating, and the long-term trend based on low-volume days is positive. Often used to confirm a long-term uptrend in price.
• Bearish Signal: NVI crosses below its moving average. This suggests smart money is distributing, and the long-term trend based on low-volume days is negative. Often used to confirm a long-term downtrend in price.

//@version=5
strategy("NVI Crossover Strategy", overlay=true)

nviStartValue = input.float(1000, title="NVI Start Value")
nviMALength = input.int(255, title="NVI MA Length", minval=1) // Long-term MA

nviValue = ta.nvi(nviStartValue, close, volume)
nviMA = ta.ema(nviValue, nviMALength)

plot(nviValue, "NVI", color.blue, display=display.pane_only)
plot(nviMA, "NVI MA", color.orange, display=display.pane_only)

// Long entry: NVI crosses above its MA
longCondition = ta.crossover(nviValue, nviMA)

// Short entry: NVI crosses below its MA
shortCondition = ta.crossunder(nviValue, nviMA)

if (longCondition)
    strategy.entry("Long NVI", strategy.long)

if (shortCondition)
    strategy.entry("Short NVI", strategy.short)

// Basic exit: opposite signal
strategy.close("Long NVI", when=shortCondition)
strategy.close("Short NVI", when=longCondition)

2. NVI Divergence (Key Reversal Signal)

Divergence between price and NVI can be a powerful signal, suggesting a weakening trend and potential reversal, as smart money's actions are not confirming the current price trend.

• Bullish Divergence: Price makes a lower low, but NVI makes a higher low. This indicates that despite falling prices, smart money is accumulating, hinting at a potential upward reversal.
• Bearish Divergence: Price makes a higher high, but NVI makes a lower high. This indicates that despite rising prices, smart money is distributing, hinting at a potential downward reversal.

//@version=5
strategy("NVI Divergence Strategy", overlay=true)

nviStartValue = input.float(1000, title="NVI Start Value")
nviValue = ta.nvi(nviStartValue, close, volume)
nviMALength = input.int(255, title="NVI MA Length", minval=1)
nviMA = ta.ema(nviValue, nviMALength)

plot(nviValue, "NVI", color.blue, display=display.pane_only)
plot(nviMA, "NVI MA", color.orange, display=display.pane_only)

// Simple divergence detection (conceptual, robust detection requires advanced pivot logic)
// This example looks for recent higher/lower swings in price and NVI.

// Bullish Divergence: Price lower low, NVI higher low
bullishDiv = close < close[1] and close[1] < close[2] and nviValue > nviValue[1] and nviValue[1] > nviValue[2]

// Bearish Divergence: Price higher high, NVI lower high
bearishDiv = close > close[1] and close[1] > close[2] and nviValue < nviValue[1] and nviValue[1] < nviValue[2]

// Plot shapes on the chart to indicate divergence
plotshape(bullishDiv, title="Bullish NVI Divergence", location=location.belowbar, color=color.green, style=shape.triangleup, size=size.small)
plotshape(bearishDiv, title="Bearish NVI Divergence", location=location.abovebar, color=color.red, style=shape.triangledown, size=size.small)

if (bullishDiv)
    strategy.entry("Long Divergence", strategy.long)
if (bearishDiv)
    strategy.entry("Short Divergence", strategy.short)

// Basic exit after a few bars or on opposite signal
strategy.exit("Long Divergence Exit", from_entry="Long Divergence", profit=close*0.02, loss=close*0.01)
strategy.exit("Short Divergence Exit", from_entry="Short Divergence", profit=close*0.02, loss=close*0.01)

3. NVI as a Long-Term Trend Filter

Given NVI's focus on smart money and its typically long-term smoothing, it can act as an excellent filter for other trading strategies, especially for confirming bull or bear markets.

• Long-Term Bullish Filter: Only take long trades from your primary strategy when NVI is above its long-term moving average. This suggests smart money is generally bullish.
• Long-Term Bearish Filter: Only take short trades from your primary strategy when NVI is below its long-term moving average. This suggests smart money is generally bearish.

//@version=5
strategy("NVI Trend Filter Strategy", overlay=true)

nviStartValue = input.float(1000, title="NVI Start Value")
nviMALength = input.int(255, title="NVI MA Length", minval=1) // Long-term MA filter

nviValue = ta.nvi(nviStartValue, close, volume)
nviMA = ta.ema(nviValue, nviMALength)

plot(nviValue, "NVI", color.blue, display=display.pane_only)
plot(nviMA, "NVI MA", color.orange, display=display.pane_only)

// Define NVI trend direction
isNviUptrend = nviValue > nviMA
isNviDowntrend = nviValue < nviMA

// Example: Combine with a simple price EMA crossover strategy
fastPriceMALength = input.int(10, title="Fast Price MA Length", minval=1)
slowPriceMALength = input.int(20, title="Slow Price MA Length", minval=1)

fastPriceMA = ta.ema(close, fastPriceMALength)
slowPriceMA = ta.ema(close, slowPriceMALength)

longEntrySignal = ta.crossover(fastPriceMA, slowPriceMA)
shortEntrySignal = ta.crossunder(fastPriceMA, slowPriceMA) // Corrected: was slowPriceMALength

// Only take long entries if NVI confirms a bullish trend
if (longEntrySignal and isNviUptrend)
    strategy.entry("Filtered Long", strategy.long)

// Only take short entries if NVI confirms a bearish trend
if (shortEntrySignal and isNviDowntrend)
    strategy.entry("Filtered Short", strategy.short)

// Exit on opposite price MA crossover, regardless of NVI filter for simplicity
strategy.close("Filtered Long", when=ta.crossunder(fastPriceMA, slowPriceMA))
strategy.close("Filtered Short", when=ta.crossover(fastPriceMA, slowMA)) // Corrected: was slowPriceMA for long exit

// Optional: Color background based on NVI trend
bgcolor(isNviUptrend ? color.new(color.lime, 95) : na, title="NVI Bullish Bias")
bgcolor(isNviDowntrend ? color.new(color.maroon, 95) : na, title="NVI Bearish Bias")

Optimizing Negative Volume Index (NVI) Performance

To get the most from the Negative Volume Index in Pine Script:

• Smoothing is Crucial: NVI can be very volatile, especially on lower timeframes. Applying a long-term moving average (e.g., 255-period EMA for daily charts) is essential to smooth out noise and identify its underlying trend.
• Focus on Divergence: Like other volume-based indicators, NVI's most powerful signals often come from divergences with price. These can provide early warnings of trend reversals as smart money deviates from the mainstream price action.
• Timeframe Consideration: NVI is more suited for longer-term analysis (daily, weekly charts) due to its theory focusing on smart money's subtle, low-volume activity. It might be less effective or generate more noise on very short intraday timeframes.
• Combine with Price Action: Always confirm NVI signals with price action. An NVI signal is more reliable if supported by clear candlestick patterns, breaks of support/resistance, or other price-based confirmations.
• Context is Key: Interpret NVI in the context of the overall market or asset. Its absolute value is not important; what matters is its trend relative to its moving average, and its divergence from price.

Common NVI Pitfalls

• Lag: As a cumulative indicator smoothed by a moving average, NVI inherently lags price action. Its signals are often for confirmation or long-term trend shifts rather than immediate entries.
• False Signals: Like any indicator, it can generate false signals, especially in markets with erratic volume patterns or during periods of very low liquidity where volume changes might not truly reflect smart money activity.
• Absolute Value Meaningless: The raw NVI value (e.g., starting at 1000) has no intrinsic meaning other than its relation to its past values and its moving average.
• Limited on High Volume Days: By design, NVI ignores price action on high-volume days. This means it misses significant information, and should always be used alongside other indicators that capture high-volume moves.
• Not a Standalone Indicator: NVI provides crucial insights but should never be used in isolation. It works best as a confirming or filtering indicator within a broader trading strategy.

Conclusion

The Negative Volume Index (NVI) is a unique and insightful technical indicator available in Pine Script for TradingView. By specifically focusing on price movements on low-volume days, it attempts to track the activity of "smart money" and provide a distinct perspective on underlying market sentiment. While its greatest strengths lie in confirming long-term trends and identifying powerful divergences with price (signaling potential trend reversals), it is most effective when smoothed with a moving average and integrated strategically with price action and other technical analysis tools. By understanding its calculation and thoughtfully utilizing its signals, you can leverage NVI to enhance your pine script strategies and gain a clearer understanding of market conviction, particularly from the perspective of informed investors.