Taking appropriate positions in the market requires the investor or the trader to have the right information. That enables them to decide quickly whether to go short or long on a certain asset depending on the potential variations in the market strength.
The cumulative volume index (CVI) is one of the significant metrics in technical analysis. This index calculates the amount of money flowing into and out of the financial market for a particular time frame. The CVI resembles the On-Balance-Volume (OBV) but differs in the sense that CVI uses real-up and down volume. (Look at the historical prices of several stocks and trading assets on Tradinview’s charts)
When there are more asset declines than increases, the CVI value is lower, meaning the market is losing momentum. Conversely, you’ll know the market is strengthening if the CVI value is higher since it means more assets rise.
Features of the Cumulative Volume Index
- It is a momentum indicator and a comprehensive market instrument for establishing the breadth
- It focuses on advancing vs. declining stocks
- The best use of CVI is looking at its overall trend
- Increasing CVI indicates a bullish market; falling CVI value indicates a bearish market
Calculation of the Cumulative Volume Index
Below is the formula for calculating CVI:
CVI= CVI for the prior period (PPCVI ) + (advancing stocks − declining stocks)
Where:
Advancing stocks is the no. of rising stocks in the current period
Declining Stocks is the no. of decreasing stocks in the current period
How to use the Cumulative Volume Index
The CVI helps establish the movement of capital or funds into or out of the entire market. If the CVI goes lower, you may assume that the trend’s momentum is weakening and a reversal is looming. On the other hand, you may assume that a CVI that is trending higher means the trend is strengthening, and it may be time to trade in its current direction. (Try out indicators on Tradingview.com)
Besides, investors and traders can check the convergences and divergences between the CVI trend lines and the price. When CVI readings do not show the highs and lows of the price, it could indicate a looming correction.
The Cumulative Volume Index is a popular indicator that traders use to determine whether capital is flowing into or out of the entire market. This data can help spot a trend. However, many traders combine the CVI indicator with other market indicators to make profitable moves.
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