Price Volume Trend
The Price Volume Trend indicator (PVT) is a momentum based indicator used to measure money flow. PVT is similar to another technical analysis tool; On Balance Volume (OBV) in that it is an accumulation of volume.
While the OBV adds or subtracts total daily volume depending on if it
was an up day or a down day, PVT only adds or subtracts a portion of the
daily volume. The amount of volume added or subtracted to/from the PVT
total is dependent on the amount of the current day's price rising or
falling compared to the previous day's close. Price Volume Trend (PVT)
can primarily be used to confirm trends, as well as spot possible trading signals due to divergences.
CALCULATION
PVT = [((CurrentClose - PreviousClose) / PreviousClose) x Volume] + PreviousPVT
Price Volume Trend combines percentage price change and volume to confirm the strength of price trends or through divergences, warn of weak price moves. Unlike other price-volume indicators, the Price Volume Trend takes into consideration the percentage increase or decrease in price, rather than just simply adding or subtracting volume based on whether the current price is higher than the previous day's price. How the formula is calculated is presented below:
- On an up day, the volume is multiplied by the percentage price increase between the current close and the previous time-period's close. This value is then added to the previous day's Price Volume Trend value.
- On a down day, the volume is multiplied by the percentage price decrease between the current close and the previous time-period's close. This value is then added to the previous day's Price Volume Trend value.
The Price Volume Trend is helpful in seeing divergences; examples of these
divergences are shown below in the chart.
The Price Volume Trend indicator is usually interpreted as follows:
- Increasing price accompanied by an increasing Price Volume Trend value, confirms the price trend upward.
- Decreasing price accompanied by a decreasing Price Volume Trend value, confirms the price trend downward.
- Increasing price accompanied by a decreasing or neutral Price Volume Trend value is a divergence and is indicating that the price movement upward is weak and lacking conviction.
- Decreasing price accompanied by a increasing or neutral Price Volume Trend value is a divergence and is indicating that the price movement downward is weak and lacking conviction.
High #1 to High #2
AT&T stock made lower highs, but the Price Volume Trend indicator made
higher highs. This bullish divergence warned that bulls might be taking control
of the stock and shorting AT&T would not be advisable.
Since the Price Volume Trend indicator multiplies positive volume when prices
close higher than the previous day's close, the Price Volume Trend indicator
could be interpreted as meaning that more volume flowed into High #2 than flowed
into High #1. More volume interest by buyers at High #2 signaled that the price
move higher had significant strength behind it and it probably was going to
continue.
Low #1 to Low #2
The stock price made higher lows, generally considered a bullish signal; the
Price Volume Trend indicator confirmed this move higher when it made higher
highs as well.
Price Volume Trend is a valuable technical analysis tool that combines both
price and volume to confirm price action or warn of potential weakness or lack
of conviction by buyers and sellers. Other similar indicators that should be
investigated further are the Chaikin Oscillator (see: Chaikin Oscillator) and the Money Flow Index
(see: Money Flow Index).
