Trading Crash Course | How to use the Price Volume Trend Indicator（PVT）when Trading
[TL; DR]
The aim of a price volume trend indicator is to establish a relationship between an asset’s price and its trading volume.
The traders can use the PVT indicator to predict price movements and confirm trends.
Divergence occurs when the indicator moves in a different direction as the price of the asset.
The PVT indicator is more accurate than the on-balance volume indicator as it incorporates the magnitude of price changes
Introduction
Most traders use price action to determine trade entry and exit points. At times, using price action on its own gives misleading signals, a reason why most people adopt technical analysis indicators. It is important to include an indicator that shows changes in trading volume to supplement price action. On-balance volume (OBV) and Price volume Trend Indicators are examples of such technical analysis tools. In this article, we discuss the price volume trend indicator.
The price volume trend indicator (PVT) is an oscillator that measures the money flow of an asset. In other words, it measures the inflow and outflow of money in a cryptocurrency, such as BTC. Significantly, its calculation also factors price movements. The price volume trend indicator is similar to the On-balance Volume (OBV) indicator as they use oscillator lines.
However, the two have a slight difference. The calculation of the OBV indicator only uses the close price of the asset while the PVT involves both the close price and its percentage change. Therefore, the PVT relates the price of the asset to its volume, thereby showing the parity between the supply and demand of the stock.
Traders use both the OBV and the price volume trend indicators in a similar way. What differs is their level of accuracy in predicting trends and momentum. Mostly, traders use the PVT to spot trading signals by using crossovers and divergences.
How to calculate the PVT?
With PVT, you multiply the trading volume by the percentage change of the price of the asset. After that you add the answer to the existing cumulative figure. On an upday, you multiply the volume by the percentage increase in the price of the asset. And on a down day, you multiply the volume by the percentage decrease of the price. We can summarize this using a formula.
PVT = [((CurrentClose - PreviousClose) / PreviousClose) x Volume] + PreviousPVT
It is important to note that people often calculate the PVT on a daily basis, although you can use it on any time frame.
Let’s take an example of a security with a trading volume of 10 000 and a price change of 0.2%. In this case, we multiply 0.2% by 10 000 and get 20. If the price had closed lower than the opening one, we subtract this amount from the PVT value. However, if the price had closed higher than the opening one, we add it.
Interpretation of the Price Volume Trend Indicator
Essentially the PVT should move in the same direction and in a related magnitude as the price of the asset. What this means is that the value of the PVT should increase with the rise in price of the asset and vice versa. If the price is increasing while the volume is decreasing it is a sign of a potential price reversal.
When the price is increasing while the PVT value is increasing that is a confirmation that the current uptrend will continue.
If the price is decreasing while the PVT value is decreasing it is a confirmation of a continuation of a downward trend.
In general, any divergence between the price and the PVT value signifies a potential price reversal. Simply stated, a divergence occurs when the indicator does not confirm the prevailing price.
Bullish divergence
A bullish divergence occurs when the price of an asset is decreasing while its volume is increasing.
Source: Tradingview
Bearish divergence
A bearish divergence occurs when the price of an asset is increasing while its volume is decreasing. A divergence indicates that a price reversal can occur at any moment.
Source: Tradingview
Exit and entry signal
Traders can use PVT to identify potential entry and exit points. A trader can establish the support and resistance levels on a PVT by observing where the cryptocurrency bounced off in the past. If the oscillator touches the lower support level, traders can open positions. Also, when the oscillator reaches the upper resistance level they can close their positions.
Signal crossovers
The traders can use a signal line, which is just above the moving average of the PVT, to identify trade entry and exit points. For example, if the PVT line crosses above the signal line, a trader can open a position. On the other hand, if the PVT line crosses below the signal line, a trader can close the position.
Source: Stockmaniacs
The crossovers are clear in the above graphs, showing both entry and exit points.
Confirmations
It is important to combine the PVT with other indicators such as Relative Strength Index (RSI) to generate more reliable signals. For instance, many traders combine the PVT with an average directional index (ADX) to confirm trends. As an example, a trader may open a trade if the 20-day moving average is above the 50-day moving average and the PVT indicator value is rising.
Similarly, a trader can exit a position when the PVT is falling at a point where the 20-day MA is below the 50-day moving average as illustrated in the following graph
Source: Stockmaniacs
Advantages of PVT
The PVT represents the market better than the on-balance volume indicator because its volume is adjusted for price changes.
The PVT takes into account both negative and positive changes in prices.
Disadvantage
The main disadvantage of the PVT indicator is that it does not show price signals.
Conclusion
The main purpose of the PVT is to show the relationship between the volume and price of an asset. The PVT indicator is an important tool for identifying trends and confirming trade setups. People can also use it to anticipate price movements through using divergences.
Author: Mashell C., Gate.io Researcher
This article represents only the views of the researcher and does not constitute any investment suggestions.
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