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 acumulative 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
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Understanding the 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
As a technical momentum indicator, VPT allows traders and analysts to identify the supply and demand parity of a stock. The following are some of the trading signals they look for.
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 tradercould 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 trends 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.
