Introduction to Price Volume Trend (PVT)
The Price Volume Trend (PVT) is a technical analysis indicator that combines price and volume data to assess the strength of a price trend. It is similar to the On-Balance Volume (OBV) indicator but differs in its calculation, as it accounts for percentage price changes rather than absolute price changes.
PVT is used by traders to confirm trends, identify potential reversals, and detect divergences between price action and volume movements. Understanding how to interpret and trade using PVT can give traders an edge in identifying strong moves and avoiding false signals.
How is the Price Volume Trend (PVT) Calculated?
The formula for PVT is:
PVT = Previous PVT + [(Close – Previous Close) / Previous Close] * Volume
- If the price increases, the volume is added proportionally to the PVT.
- If the price decreases, the volume is subtracted proportionally.
- The result is a cumulative indicator that fluctuates with price and volume changes.
Unlike OBV, which simply adds or subtracts volume based on price direction, PVT adjusts volume based on the relative price movement. This makes it more sensitive to price changes and a better tool for trend confirmation.
How to Use Price Volume Trend (PVT) in Trading
PVT can be utilized in multiple ways to develop profitable trading strategies. Below are some of the most effective methods.
1. Trend Confirmation Strategy
Concept
The primary use of PVT is to confirm the prevailing trend. If price action and PVT are moving in the same direction, it indicates a strong trend. If they diverge, it may signal a potential reversal.
Trading Rules
- Uptrend Confirmation: If PVT is making higher highs alongside price, the trend is strong, and traders should favor long positions.
- Downtrend Confirmation: If PVT is making lower lows along with price, the bearish trend is strong, and traders should favor short positions.
Example
- Suppose a stock price rises from $50 to $60 with increasing PVT values. This confirms strong buying interest and suggests that the uptrend is sustainable.
- Conversely, if the price declines from $60 to $50 with a declining PVT, it confirms selling pressure, supporting the downtrend.
2. Divergence Strategy
Concept
Divergence occurs when the price moves in one direction while PVT moves in another. This indicates that volume is not supporting the price action, often a precursor to reversals.
Trading Rules
- Bullish Divergence: Price is making lower lows, but PVT is making higher lows. This suggests weakening selling pressure and a potential reversal to the upside.
- Bearish Divergence: Price is making higher highs, but PVT is making lower highs. This indicates weakening buying pressure and a potential reversal downward.
Example
- A stock price is in a downtrend, hitting new lows at $45, but PVT is making higher lows. This suggests that sellers are losing strength, and a reversal to the upside may occur.
- If a stock price reaches $80 but PVT is failing to make new highs, this indicates that volume is not supporting the rally, and a drop in price may follow.
3. Breakout Trading Strategy
Concept
Breakouts occur when the price moves beyond a key resistance or support level with strong volume. PVT can be used to validate these breakouts.
Trading Rules
- Valid Breakout: If price breaks a resistance level and PVT rises significantly, it confirms strong demand and suggests a valid breakout.
- False Breakout: If price breaks a level but PVT does not rise significantly, the breakout might lack conviction and could be a trap.
Example
- A stock has been trading between $100 and $110. If it breaks above $110 with a rising PVT, traders can enter a long position, expecting further gains.
- If the price breaks above $110 but PVT remains flat or declines, it could be a false breakout, and a retracement might follow.
4. Moving Average Crossover with PVT
Concept
Applying a moving average (MA) to the PVT can help smooth out fluctuations and generate trading signals based on crossovers.
Trading Rules
- Bullish Signal: When PVT crosses above its moving average, it suggests increasing buying pressure and a potential uptrend.
- Bearish Signal: When PVT crosses below its moving average, it indicates increasing selling pressure and a potential downtrend.
Example
- A 20-period MA is applied to the PVT. If the PVT line crosses above the MA, it signals a buy opportunity.
- If PVT crosses below the MA, it suggests selling pressure and a potential decline.
5. PVT and Support/Resistance Levels
Concept
PVT can help validate key support and resistance zones. Strong volume changes in these areas suggest whether a level will hold or break.
Trading Rules
- Support Confirmation: If price reaches a known support level and PVT starts rising, it suggests strong buying interest and a potential bounce.
- Resistance Confirmation: If price approaches resistance and PVT starts declining, it suggests weakening demand and a possible reversal.
Example
- A stock trades near $90 support. If PVT starts increasing, it signals strong accumulation, increasing the probability of a rebound.
- If a stock reaches $120 resistance and PVT starts falling, it suggests distribution, increasing the chances of a pullback.
Advantages of Using PVT
- More Sensitive Than OBV: PVT adjusts for percentage price changes, making it more responsive than OBV.
- Effective Trend Confirmation: It helps confirm uptrends and downtrends, reducing false signals.
- Identifies Divergence: Detects discrepancies between volume and price movements for early reversal signals.
- Works Well with Other Indicators: Can be combined with moving averages, RSI, MACD, and Bollinger Bands for stronger trade setups.
Limitations of PVT
- Not a Standalone Indicator: Should be used with price action and other indicators for better accuracy.
- Lagging Nature: Like other volume-based indicators, PVT reacts after price movement, which may lead to delayed signals.
- False Signals in Low Liquidity Stocks: In stocks with low trading volume, PVT signals may not be reliable.
Conclusion
The Price Volume Trend (PVT) indicator is a powerful tool for analyzing trends, detecting divergences, and confirming breakouts. By integrating it into a well-structured trading strategy, traders can improve their decision-making and enhance their profitability. While PVT is highly effective, it is best used in conjunction with other technical indicators and sound risk management practices.
Understanding and mastering PVT can provide valuable insights into market dynamics, helping traders make informed and profitable trading decisions.