What Is a Volume Price Trend Indicator (VPT)?
Let me explain what the volume price trend (VPT) indicator is. It helps you determine a security’s price direction and the strength of any price change. This indicator builds a cumulative volume line that either adds or subtracts a multiple of the percentage change in the share price’s trend along with the current volume, all depending on whether the security is moving up or down.
Understanding the Volume Price Trend Indicator (VPT)
You should know that the VPT indicator lets you gauge the balance between a security’s demand and supply. The percentage change in the share price trend reflects the relative supply or demand for that security, and the volume shows the force driving that trend. It’s a lot like the on-balance volume (OBV) indicator because it tracks cumulative volume and gives you insights into a security’s money flow. If you’re using most charting software, you’ll find the VPT indicator already built in.
Trading With the Volume Price Trend Indicator
As a technical momentum indicator, the VPT helps you and other traders spot the supply and demand parity in a stock. Here are some key trading signals to watch for.
Signal Line Crossovers
You can apply a signal line, which is simply a moving average of the indicator, to generate trading signals. For instance, you might buy a stock when the VPT line crosses above its signal line, and sell when it drops below.
Confirmations
Use the VPT alongside moving averages and the average directional index (ADX) to confirm trending markets. You could buy if the 20-day moving average is above the 50-day one and VPT values are rising. On the flip side, sell if the 20-day is below the 50-day and VPT is falling. The ADX measures trends and momentum too, so pair it with VPT to verify a trending market. An ADX above 25 means the security is trending, while below 25 suggests sideways action. Buy when ADX is over 25 and VPT is above its signal line; sell when ADX is under 25 and VPT is below.
Divergence
You can also use the VPT to identify technical divergence. This happens when the indicator hits a higher high or lower low, but the security’s price does the opposite—like a lower high or higher low. To manage risk, place a stop-loss order above the most recent swing high or below the most recent swing low.
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