Traders can use volume-price trend to make better decisions, as with other indicators. In this guide, we’ll cover everything you need to know to try it.
Volume-price trend (VPT), also referred to as price-volume trend, blends market price and volume to create a hybrid indicator of both variables.
The concept is to multiply the market’s volume by the percentage change in price over a specified interval, typically daily. If price drops, the indicator’s value does too because of the negative value, but if price rises, the indicator’s value also climbs higher.
Volume-price trend is, at its core, similar to on-balance volume (OBV). As you may be aware, the OBV indicator increases or decreases according to whether price has reached a new high or a new low. The calculation doesn’t include the extent of the move. But with volume-price trend, the indicator will move depending on the size of the change in price.
The basic premise behind volume-price trend is that the indicator’s movement should follow the direction of the price and match the move’s magnitude. Generally, it’s assumed that price moves accompanied by low volume places a market at risk of a reversal in trend.
Let’s say we were studying a chart showing that a market’s uptrend accelerated without any obvious volume shift, which might tell technical analysts that the move in the index was weak or slight. This would create a situation in which price could drop when more volume enters the market.
Volume-price trend would only have registered what a pure volume indicator showed if volume were to be dropping, given the move in price was calculated into volume-price trend. As a result, the price move would mostly match the volume-price trend.
How is VPT Calculated?
Traders measure VPT as volume multiplied by the change in price, and it’s calculated as a running total from the preceding period. This is the formula:
VPT = Previous VPT + Volume x (Today’s Close – Previous Close) / Previous Close
Traditionally, volume-price trend is calculated on a daily basis, but it can be measured across any timeframe when relevant volume data is available. However, some charting platforms don’t provide users with volume data on a timeframe that’s lower than the daily level, which can prevent you from using the indicator over multiple time intervals for trades.
How Traders Interpret VPT
Traders looking at volume-price trend and its relation to price are searching for divergences: a divergence between price and volume will usually tell you something useful.
When volume remains flat but price increases, a trader may deduct that the price’s up move was somewhat weak and could end up reversing. The trader observing this could expect the market to increase further and be less likely to pursue long trades.
For example, one type of divergence traders may look for is price increasing while VPT declines on net, which would suggest the up move was somewhat weak and unlikely to last.
How Trading with VPT Works
It’s crucial that you don’t use one indicator independently when making trade decisions, as this would be a type of misuse. Indicators are supposed to help traders make smarter, better-informed choices or find entry points more easily, but you shouldn’t rely on an indicator as a standalone system.
You can use other options, such as fundamental analysis or delving deeper into technical analysis, alongside VPT to make a well-rounded decision. This may help you identify valuable opportunities and achieve better results.
Conclusion
Volume-price trend combines volume and price to create a cumulative running indicator that gauges price movements’ perceived validity. Divergences hold the key in valuing volume-price trend in relation to price: if price shifts in one or another direction without being matched by an increase in volume-price trend, traders could interpret the price move as being ready for reversal.
Bullish divergences will involve price decreasing with volume-price trend up or, at the least, flat. But bearish divergences will involve price increasing while volume-price trend is down or flat. When price mainly matches with volume-price trend, this can help to confirm any current market trend.
