What is the Volume Price Trend Indicator?
The Volume Price Trend (VPT) Indicator helps in determining a security’s price direction and the strength of price change. It builds a cumulative volume line by adding or subtracting a multiple of the percentage change in a share price’s trend and current volume, depending on whether the security’s movement is upward or downward.
Example of the Volume Price Trend Indicator
Understanding the Volume Price Trend Indicator (VPT)
The VPT Indicator serves as a crucial tool for understanding the balance between a security’s demand and supply. The percentage change in the share price trend indicates the relative supply or demand for a particular security, while volume highlights the momentum behind the trend. The VPT offers a similar function to the On-Balance Volume (OBV) Indicator by measuring cumulative volume and offering insights about a security’s money flow. Most charting software includes the VPT indicator.
Trading With the Volume Price Trend Indicator
As a technical momentum indicator, VPT enables traders and analysts to gauge the supply-demand dynamics of a stock. Here are some trading signals you can look for:
Signal Line Crossovers
A signal line, essentially a moving average of the indicator, can be used to generate trading signals. For instance, trading strategies might propose buying when the VPT line crosses above its signal line and selling when it dips below.
Confirmations
VPT can be used along with moving averages and the Average Directional Index (ADX) to validate trends in the market. For example, a trader might buy if the 20-day moving average is higher than the 50-day moving average and the VPT values are rising. Conversely, selling may be ideal when the 20-day moving average falls below the 50-day moving average and VPT values are declining.
The ADX, which measures trend strength and momentum, can also be used with VPT to confirm market trends. An ADX value above 25 indicates a trending market, whereas below 25 indicates a range-bound market. Hence, traders might buy when the ADX is above 25 and the VPT line is above its signal line, and sell when the ADX is below 25 and the VPT line is below its signal line.
Divergence
Traders use the VPT Indicator to detect technical divergence. Divergence happens when the indicator records a higher high or a lower low, but the security’s price does not follow suit. For risk management, traders should place a stop-loss order above the latest swing high or below the most recent swing low.
Related Terms: On-Balance Volume, Moving Averages, Average Directional Index, Traders, Signal Line
References
- Trading View. “Volume Price Trend with Divergence and Pivot Points”.
- IFC Markets. “Average Directional Index - ADX Indicator”.