Bringing the NVT indicator into the Trading Room
Integrating fundamental indicators into our trading routines is usually a hard job. The data tends to be scattered and unavailable for us to include it in our charting software.
At Obvious Capital we’ve faced the challenge to lower the barriers. We’ve been able to include some fundamental-based indicators into our TradingView charts.
And the result is refreshing. It does bring new reads that were not available to us until now.
Please let me share with you some insights to integrate the Network Value to Transactions (NVT) indicator into your trading room.
Quick NVT Overview
Predicting bubble tops is not an easy task. The NVT indicator (also known as the NVT ratio) became popular after Bitcoin painted the All-Time High last December 2017. The NVT was THE indicator that called for the top.
And not only that, because the NVT indicator worked great also during the Bitcoin run up to $259 in April 2013, and the crash of the December 2013 bubble.
Let’s now dive into the fun part and start discovering ways to maximize our reads of the NVT indicator.
Predefined NVT OB/OS Levels
This is a strategy suggested by Willy Woo to pick tops and bottoms. We do set up predefined levels for OverBought (OB) and OverSold (OS) conditions.
In the case of Daily Bitcoin Chart, these values are 150 for OB and 45 for OS. Therefore, the default read is:
- Anytime NVT moves beyond 150 in Daily Chart it will tend to in OB condition.
- Anytime NVT moves below 45 in Daily Chart it will tend to in OS condition.
This approach still works well for NVT and Bitcoin. But we do know that predefined levels in a non-capped oscillator will need to be reviewed over time. They won’t stay the same forever. As the network matures, new levels shall take place.
The same principle applies in case of higher time frames. If we want to determine tops and bottoms using the Weekly Chart, we would need first to estimate OB and OS levels.
The main issue with this methodology is that we’ll only know after the fact that a level is not working anymore as OB/OS.
At the same time, we’ll need to review the validity of the levels over time for each of the time frames that we use.
Regardless of these issues, the levels might tend to stay valid for some years because this is a slow-moving indicator, so it is not that dramatic after all.
NVT Trendline Break
This is a trading strategy that would allow us to exit the markets much sooner than with the Predefined Levels.
The idea is to draw trendlines in our NVT oscillator and take the signal on the trendline break.
If we review the Bitcoin market top from December 2017, we can clearly identify 4 chances to decent exits.
- Dec 19th, 2017. That’s the second day after topping. On crossing below the short term blue trendline, we would have exited the market at $17700. Retrospectively, that’s what I call a pretty accurate call.
- Dec 27th, 2017. That day we crossed below the intermediate Fuchsia trendline, and it would have granted an exit at $15400.
- Jan 5th, 2018. If we had doubts about the previous 2 calls, we could have waited for the trendline to be tested from the other side. The failed test of the trendline would have allowed us to exit at $16950. Impressive, isn’t it?
- Jan 15th, 2018. On that day we crossed below our NVT long-term trendline. Taking that signal would translate into exiting at $13650.
Overall this approach offers enough flexibility to serve well to multiple types of traders. Each trader has unique preferences. Therefore, having the ability to pick the reference trendline of our choice brings some comfort to fit the tool in our trading plan.
NVT divergences
Another way to trade the NVT indicator is by identifying divergences with respect to the price action.
We know that some oscillators tend to disassociate from price action when tops and bottoms are painted. That behavior ends up showing in the form of divergences.
In the case of Bitcoin market top during December 2017, we do see that it would have been profitable to trade the Bearish Divergence that formed at the top.
The confirmation of that divergence happened on Dec 19th and it would have granted an exit at $17700.
NVT Divergences are a great addition to our trading arsenal. But regardless of this, we prefer not to trade divergences per se. We’ve found more profitable to use their signal to confirm other indicators or to trigger the hunt for market structure.
NVT Break of Signal Line
A fifth approach considers plotting a smoother NVT version that would serve as a signal line. That would allow us to trade the cross above and below that signal line.
We can see how the first break of the signal line confirmed on Dec 19th 2017 (same as the bearish divergence and the trendline break… coincidence¿?). Again, that would have allowed us to exit the market at $17700.
If we had waited for more confirmation, we do see that the NVT tested the signal line and stayed briefly over it during the countertrend rally. On Jan 7th 2018 it broke down again allowing us to exit at $16125
Another example is the break down of Bitcoin below $6000 level. After some months consolidating above that level, it finally broke below.
The NVT anticipated that move and allowed and allowed some days to enter the trade. It resulted in a very nice profit on a move down to 50% absolute levels.
[Market live note. Right as I am writing these words I see NVT confirming the $3000 local lows. Looks like we got a signal to re-enter the market at 3500. Usually, we do want to consider trades that are aligned with our reference trend, so please proceed with caution if you don’t have bullish scenarios to support this signal.]
Trading the NVT crosses with the signal line is a wonderful approach to be considered during trending markets. Beware of using it in ranging markets because you are at risk of being washed out on almost every cross.
Wrapping up
The NVT indicator has proven to be a valuable option to be considered in our Bitcoin trading to identify potential market pivots.
If you’re new to trading, please consider including some additional factors to justify taking a trade. In fact, we do require more than just one indicator read. The above strategies are one of the reasons to take a trade, so you better have more reasons than just the naked read of a single indicator.
I’d love to hear your feedback and insights.
These are not the only ways to trade the NVT indicator. I’m sure a seasoned trader could come up with some additional ways to trade it.
Resources
- NVT indicator for TradingView: https://www.tradingview.com/script/OWMHm70g-NVT-Signal-Network-Value-to-Transactions/
- Willy Woo: Introducing NVT Ratio (Bitcoin’s PE Ratio), use it to detect bubbles
- Dmitry Kalichkin: Rethinking Network Value to Transactions (NVT) Ratio
- Willy Woo: NVT Signal, a new trading indicator to pick tops and bottoms
Disclaimer
The information contained in this artile (the “Information”) has been prepared solely for informational purposes, is in summary form, and does not intent to be complete. In particular, the Information is not, and is not intended to be, an offer to sell, or a solicitation of an offer to purchase, any securities. Any offering and sale of securities by us or any related entity (if any) would be made only on the basis of certain transaction documents and, as the case may be, an offering memorandum and related governing and subscription documents pertaining to any such offering and sale.
The Information does not provide and should not be treated as giving investment advice. The Information does not take into account specific investment objectives, financial situation or the particular needs of any prospective investor.
