What is a Volume Price Trend Indicator (VPT)?
The volume price trend (VPT) indicator helps determine a security’s price direction and strength of price change. The indicator consists of a cumulative volume line that adds or subtracts a multiple of the percentage change in a share price’s trend and current volume, depending upon the security’s upward or downward movements.
Example of the Volume Price Trend Indicator
Understanding Volume Price Trend Indicator (VPT)
The volume price trend indicator is used to determine the balance between a security’s demand and supply. The percentage change in the share price trend shows the relative supply or demand of a particular security, while volume indicates the force behind the trend. The VPT indicator is similar to the on-balance volume (OBV) indicator in that it measures cumulative volume and provides traders with information about a security’s money flow. Most charting software packages have the VPT indicator included.
Trading with the Volume Price Trend Indicator
Signal Line Crossovers: A signal line, which is just a moving average of the indicator, can be applied and used to generate trading signals. For example, a trader may buy a stock when the VPT line crosses above its signal line and sell when the VPT line passes below its signal line.
Confirmations: The VPT indicator can be used in conjunction with moving averages and the average directional index (ADX) to confirm trending markets. For instance, a trader could buy a stock if the 20-day moving average is above the 50-day moving average and accompanied by rising VPT indicator values. Conversely, the trader may decide to sell if the 20-day moving average is below the 50-day moving average and the indicator’s values are falling.
The ADX also measures trend and momentum and can be used with the VPT indicator to confirm that a market is trending. ADX readings above 25 indicate that a security is trending, while readings below 25 indicate sideways price action. Therefore, a trader could buy when the ADX is above 25 and the VPT line is above its signal line. They could sell when the ADX has a value below 25 and the VPT line is below its signal line.
Divergence: Traders can use the VPT indicator to spot technical divergence. Divergence occurs when the indicator makes a higher high or a lower low, but the security’s price makes a lower high or a higher low. Traders should place a stop-loss order above the most recent swing high or below the most recent swing low to minimize risk. (For more, see: What Does it Mean to Use Technical Divergence?)