Volume Price Trend Indicator (VPT)

The volume–price trend (VPT) indicator, also known as the price–volume trend, is a stock market indicator that helps traders link a stock’s price to its trading volume. VPT depends on a running total volume that adds or takes away a various of the rate change in share value pattern and current volume, contingent on the speculation’s upward or descending developments. The indicator consists of a cumulative volume line that, depending on the security’s upward or downward movements, adds or subtracts a multiple of the percentage shift in the share price’s trend and current volume.

The essential thought behind the indicator is to duplicate the market’s volume by the rate change in the cost over a given span (typically day by day). It recognizes the equality among organic market Supply and request. The laws of supply and demand are microeconomic principles that state that inefficient economies, the quantity of a good supplied and demanded are identical. The VPT is unique in relation to other cost volume pointers because of the way that it thinks about the rate increment or reduction in cost and not simply add or deduct the volume dependent on whether the current cost is higher than the earlier day’s cost.

Example of Volume Price Trend Indicator (VPT)

The VPT is used in trading for signal line crossovers, confirmations, and divergences, along with other moving averages. On-balance volume (OBV) is conceptually similar to VPT. The indicator rises or decreases depending on whether the price actually rendered a new high or low with on-balance amount. It does exclude the degree of the move into its computation. With VPT, the marker moves dependent on how large of a move was made in cost.

The volume price trend indicator is used to assess the demand and supply balance for a security. VPT is based on the idea that the indicator should shift in the same direction as the price and roughly match the magnitude of the move. It is for the most part expected that when value moves are joined by low volume, this places a market in danger for an inversion in pattern. The relative supply or demand of a particular security is expressed by the percentage change in the share price trend, while the force behind the trend is represented by the value.

Formula for Calculating the Volume Price Trend Indicator:

VPT = Previous VPT + Volume × (Today’s Closing Price – Previous Closing Price) / Previous Closing Price

VPT is deciphered in comparable manners to OBV. For the most part, the thought is that volume is higher on days with a value move the predominant way, for instance in a solid upswing more volume on up days than down days. As a result, when prices rise, VPT should rise as well, and when prices reach a new rally peak, VPT should as well. If VPT fails to break through its previous rally high, this is called a negative divergence, signaling a poor shift.

The indicator works by multiplying a stock’s market volume by the percentage change in its price. The value of the indicator decreases as the stock price decreases. When the price increases, so does the value. The VPT is for the most part determined consistently; however, it tends to be estimated over any time span with which volume information is accessible. At the point when merchants take a gander at VPT and how it identifies with value they are in a general sense searching for divergences.

If volume was decreasing, VPT would have just picked up on what a pure volume predictor indicated (given the price move is calculated into VPT). As a result, price movements are mostly balanced with VPT. The indicator can be utilized related to moving midpoints and the average directional index (ADX) to affirm moving business sectors. For example, if the 20-day moving average is above the 50-day moving average and the VPT indicator values are rising, a trader might buy the stock. If the 20-day moving average is below the 50-day moving average and the indicator’s values are dropping, the trader will decide to sell.

The ADX additionally gauges pattern and energy and can be utilized with the VPT marker to affirm that a market is moving. ADX readings over 25 show that a security is moving, while readings under 25 demonstrate sideways value activity. The VPT is typically used by investors and traders to search for divergences. When the price of a stock shifts in the opposite direction of an indicator, it is called a divergence. It normally indicates that the price might be about to change course.

In the event that cost moves toward some path and isn’t coordinated by at any rate an attendant expansion in VPT, at that point dealers may see the value move as shallow and ready for inversion. To mitigate risk, traders should position a stop-loss order above or below the most recent swing high or low. A trader who uses VPT and watches the market may not follow long trades in the expectation of the market rising further. The VPT meanings can be summarized as follows:

  • An increase in price, as well as volume, confirms the price trend upward.
  • A decrease in price, as well as volume, confirms the price trend downward.
  • A divergence is a rise in price that is followed by a declining or flat volume trend, which may indicate that the downward price shift is poor and won’t last.
  • A divergence is a price decrease followed by a growing or flat volume pattern, which may mean that the upward price movement is slow and won’t last.

A value that generally coordinates with VPT may help affirm any latest thing on the lookout. In the specialized examination, the VPT is utilized essentially on longer-term outlines because of its total nature. As compared to the actual VPT value, it becomes difficult to use on short-term and intraday charts because the adjustments can be minimal. Rather than being used as standalone systems, the metrics are best used as guidelines for trading decisions.

Information Sources:

  1. daytrading.com
  2. corporatefinanceinstitute.com
  3. investopedia.com
  4. wikipedia