This indicator was introduced by Larry Williams in 2007 and is very similar to the well known OBV indicator. As such, it should be examined for convergence and divergence with the price trend. The interpretation can be done using the Wyckoff principles.
* Price rises, POIV stays behind => no subsequent demand * Price meets resistance, POIV reaches new highs => supply (distribution) in the background * Price and POIV rise synchronously => price trend is intact
These statements can of course be applied correspondingly to falling prices.
Larry Williams wrote for explanation:
Despite the problem, volume indictors have proven their worth, but while it is a good idea to watch the cumulative flow of buying and selling pressure, you should not assign all of this buying and selling to bulls and bears. Combined with other concepts, such as keying off the open, we can focus on something more germane to trading based just on volume, or what some might consider related volatility indicators, such as daily ranges.
Futures traders can consider at least one solution to this problem: open interest. Open interest is the number of outstanding contracts in a particular market. (...))
The formula is calculating the cumulative sum of open interest times the net change in price, divided by the true range. We then add the OBV value to this cumulative sum.
So we first take the net change in price (today’s close minus yesterday’s close) to get a percentage of where within the range the close was. Not all of the activity will be buying or selling; the market “tells” us what percentage of open interest goes to the buy or sell side.
Not only that, it also means we are incorporating price and trend change into the formula.
(...)
One note of warning is necessary. The Williams POIV AD is a specific formula that compensates for the close within the range relationship, as well telling us how much OI to use, but it is an indicator, not a trading system. In practice, it is useful to confirm a trade or to focus attention on a potential trade. It is not intended to stand as the sole reason to initiate a position in the market.
@waynem59, since open interest is only published weekly, this indicator is only relevant on the weekly timeframe?
dreadnought11
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@dreadnought11, actually nevermind that, there is the daily data
IvanPanchenko
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OBV is not real volume, tick volume in this indicator?
waynem59
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@IvanPanchenko: no, tick volume does not matter here. The POIV takes into account the open interest, the volume and the real price movement in relation to the price range (POIV = _P_rice _O_pen _I_nterest _V_olume). Therefore, it is a reflection of a cause (price-relevant volume) from which we expect an effect (price movement). If the POIV trend is congruent with the price trend, the price trend is considered healthy. If the two diverge, then the relationship between supply and demand changes, which can become a cause of coming changes in the price trend. If you want to learn more about this, please google on the terms "Wyckoff three principles".
IvanPanchenko
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@waynem59, Larry Williams' formula looks like this: Cumulative Sum (Open Interest * (Close - Close.1) / (True High - True Low)) + OBV. As you can see Larry is adding OBV, so I clarify, you are not adding OBV at all?
IvanPanchenko
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@waynem59, I looked at the code, not a programming expert, but I roughly realized that the volumes are calculated. If I understand correctly, Larry uses real volumes supplied by the exchange. And also, as an open interest, it uses not data from CFTC reports, but CME daily bulletin.