Last Updated on September 8, 2023
The Trade Volume Index (TVI) is a technical indicator that follows the price movement of security when major price changes and volume occur at the same time. Often compared to the On Balance Volume (OBV), TVI is used to confirm trading signals, as it is the usual case for all volume-based indicators.
What is The Trade Volume Index (TVI)?
As already noted, TVI refers to a technical indicator that tends to move in a direction of a price trend and is dependent on the substantial price changes and volume occurring at the same time.
The TVI uses intraday market data to help traders understand whether a security is being bought (accumulated) or sold (distributed). The indicator achieves this by assuming that higher security prices represent accumulation (buy orders) while low prices represent distribution (sell orders). The TVI is often compared to the OBV momentum indicator. However, the OBV mainly uses daily prices, as opposed to TVI, which uses intraday ‘tick’ prices.
Tick prices usually show transactions at the buy or sell price for longer time periods with no changes. Because of this, flat support or resistance levels are formed in the price chart. As long as prices remain unchanged, the TVI continues to add volume in buy or sell areas, depending on the most recent price change.
Why is market volume important?
Essentially, security price movements represent accumulation or distribution, depending on their direction. However, these movements can be misleading as sometimes, beneath a simple move up or down, price trends may be building. For this treason, investors look at other signs to confirm price signals, such as the market volume.
Put simply, market volume tells investors how many shares have been traded during a specific period of time. While the volume on its own may not be enough to help traders pinpoint important trend changes, it can help them understand how strong a price move could be.
In most cases, security prices appreciate when the trading volume is on the rise. In other words, if the price of a security is rising, the trading volume of that security should also grow, and the other way around.
Understanding How The Trade Volume Index Works
As already noted above, the TVI serves as a measure of the number of funds flowing in and out of a security or market. To achieve this, the indicator typically uses a security’s “tick” price data. The indicator depends on the direction of the trend and whether the underlying security is being accumulated or distributed. Once the direction is determined, TVI can be calculated.
Source: TradingTechnologies
Calculating The Trade Volume Index
To calculate the TVI, a trader first must learn the minimum tick value (MTV) of the security. After that, the price change has to be computed by subtracting the last price from the most recent price. The trader then must determine the trend direction.
If the price change in the security is greeted than the minimum tick value, the security is considered in an accumulation period. On the other hand, if the price change in the security is lower than the minimum tick value, it means that the distribution has taken over. If the price change is less than or equal to the MTV, or greater than or equal to the MTV, the security’s current direction is the same as the previous direction.
Once the direction is known, a trader can calculate the TVI. If the security is in an accumulation period, the current TVI is calculated by adding the current day’s volume to the previous trade volume index. In contrast, if the security is in a distribution period, the TVI is calculated by subtracting the current day’s volume from the previous TVI.
Below is the formula for calculating the TVI, assuming one has determined the trend direction.
During periods of accumulation:
TVI = Previous TVI + Today’s Volume
During periods of distribution:
TVI = Previous TVI – Today’s Volume
The calculation of TVI can vary from industry to industry as sometimes different programs and formulas are used to find the index’s value. In most cases, TVI is calculated using a minimum tick value and intraday price data. Traders can change the MTV when calculating the TVI, though it is normally set at 0.5.
How to Use Trade Volume Index
Generally, traders and investors use volume indicators to confirm trading signals at different price points in the chart. Traders easily identify strong trading signals when the market volume is backing the latest price change. This happens when strong trading volume happens along with an evident bullish or bearish sentiment.
While the Trade Volume Index adheres to the fundamental concepts around market volume, the indicator also associates price action with volume. For instance, if the price change is higher than the minimum tick value, the method sees this as accumulation and adds more volume.
On the other hand, if the change is lower than the MTV, the method refers to this as selling pressure and subtracts market volume. That said, the TVI increases amid major price increases and higher volume and decreases during significant price drops with lower volume.
Trend Volume Indicator Bullish Signals
As indicated, traders use the TVI to gauge accumulation or distribution within security. As an example, let’s say the price change in a security is greater than MTV and has been on the rise for several hours. This indicates that investors are currently accumulating the security, generating a bullish signal that the price of the security could jump further due to the bullish sentiment.
In contrast, if a trader is looking to buy the security at a specific price point, and the security has been flatlining at a particular level for the past few hours, it might be best to avoid pulling the trigger as accumulation is weak ahead of the breakout.
Trend Volume Indicator Bearish Signals
Oppositely, when a security’s price change is lower than the MTV and has been trending down for a couple of hours, this typically indicates that the selling pressure is stronger and is considered a bearish signal. This signal tells traders that the security’s price could drop further, driven by distribution, indicating that it is time to sell the security.
List of Trading Volume Indicators
Traders regularly analyze volume indicators to identify and confirm price trends and patterns. Normally, the high volume suggests higher interest in the underlying security, while the low volume indicates the opposite. Because trading volume provides such useful information, there are several trading volume indicators traders look to reinforce their decision-making process.
On-Balance indicator (OBV)
OBV is a widely used volume indicator that gauges accumulation and distribution by adding volume on up days and subtracting volume on down days. For example, if a security’s price closes at a higher level than its previous close, the OBV views all of that day’s volume as up-volume. Conversely, when the security closes at a lower point than its previous close, that day’s volume is considered down-volume.
However, with OBV, it is more important to focus on the indicator’s direction rather than its value. If both the security price and the OBV are on the rise, it suggests that the uptrend is likely to continue. Similarly, if both the price and the OBV are declining, it indicates that the downtrend is likely to continue.
Volume RSI
The Volume RSI (Relative Strength Index) refers to a technical indicator that measures price trend changes using changes in up volume and down volume. The Volume RSI is similar to the RSI indicator, although the former uses the bullish and bearish volume in the calculation formula. The indicator hovers around the 50% center line in the 0% – 100% range.
Traders use the Volume RSI by trading the signals that are produced on the crossover of the indicator and the 50% center line. If the indicator is above the 50% line, it is considered a bullish signal. On the other hand, if Volume RSI is below the 50% center line, this is considered a bearish signal.
Volume Price Trend Indicator (VPT)
The Volume Price Trend (VPT) refers to a volume indicator that helps traders ascertain a security’s price direction and the extent of the price change. The VPT is often compared to the OBV indicator as both indicators serve to gauge cumulative volume, providing traders with information about the money flow of security.
Traders can employ the VPT in trading by monitoring the signal line, which represents the moving average (MA) of the indicator. For instance, if the VPT line rises above the signal line, this is considered a buy signal, and the other way around. The indicator is also frequently used together with MAs and the average directional index (ADX) to confirm market trends.
Accumulation/Distribution (A/D)
The accumulation/distribution (A/D) is a volume-based indicator that also uses the price to gauge whether a stock is being accumulated or distributed. This indicator measure seeks to identify when the stock price diverges from the volume flow. This way, investors and trades can better understand how strong a trend really is.
A/D suggests accumulation volume when the asset price is going up, but the indicator is going in the opposite direction, and vice versa.
Money Flow Index (MFI)
The Money Flow Index (MFI) is a momentum indicator that is focused on the flow of funds in and out of an asset. The MFI is similar to RSI, although the former is more focused on the volume, while the RSI is mostly a price-based indicator.
Conclusion
The Trade Volume Index uses market data to understand if an asset is being accumulated (purchased) or distributed (sold). In order to better understand this situation, the TVI uses tick data to can generate insights about the amount of buying and selling in security.
In essence, if the TVI is going higher, it practically means that more people are buying, and the stock price is going up. On the other hand, if the TVI is falling and shares of the company are dropping, it suggests that a strong downtrend is in play. This is because volume indicators generally tend to confirm trading signals, like the direction or breakouts.
