Volume plays an important role in price movements. To put it simply, say a stock is being bought at a certain level. But there are sellers who are selling the stocks.
Now if the buyers buy in large amounts, all the sold stocks will be bought. If the buyers want to buy more, there will be a gap in demand and supply.
With rising demand, the stock price will rise automatically due to a lack of availability. In such situations, the trade volume will also increase.
So, we will find that both the traded volume and the stock price are rising simultaneously. Similar things hapa pen in the downtrend. Stock prices fall with the increase in volume.
Volume price indicator (VPT), also otherwise known as price volume indicator, includes both volume and price in a hybrid form to create this indicator. This indicator is similar to the On BVolume volume indicator.
Importance of High Volume
High volume in stock shows traders’ interest in that stock. When a price rise is accompanied by high trade volume in that stock, it signifies that there are many buyers who want to buy that stock even at higher prices. Bears succumbed to bulls and an uptrend is developing.
Similar situation occurs during an established downtrend. Stock prices come down with high volume during an established downtrend. It shows that sellers are interested in selling the stock. The higher volume shows the greater interest of the traders.
Importance of Low Volume
Low volume trades carry a different meaning. When the price action is accompanied by low volume, that indicates a lack of interest on the part of traders.
If a stock price moves up and volume doesn’t go up, or volume comes down, we call it a divergence. It means the volume movement is in disagreement with price action.
In such cases, due to a lack of interest from traders, the uptrend doesn’t continue and the trend is going to reverse.
A similar situation occurs in a downtrend when there is divergence with volume. The downward price movements do not continue and the trend reverses.
We can summarize this movement in a tabular form.
From the table above, we can see that when the price goes up or comes down with increasing volume, the trend is supposed to continue. It can be either bullish or bearish. But when the price action is not supported by volume, the trend is weak and not going to continue.
Must Read: Volume Analysis in Trading
What is the Volume Price Trend (VPT) Indicator?
The volume price trend or the VPT is a hybrid indicator that includes both price and volume movement within one indicator.
This indicator assumes that volume movement should accompany price action. It is basically a volume indicator that helps in finding the change in direction of price action and the strength of price change.
Calculation of Volume Price Trend (VPT)
The volume price trend indicator creates a scale. The scale measures cumulative volume multiplied by the change in price. It is calculated as the running total from the previous period.
The formula is
VPT = Previous VPT + Volume * (Current close – Previous close) / Previous close
From the formula, we can see the VPT indicator multiplies the stock volume with the percentage of change in stock price. If the stock price falls, the VPT value also declines. If the price goes up, the VPT also rises. The indicator moves based on the percentage shift in price.
Traditionally the volume price trend is calculated daily. But it can be calculated on the basis of data available for any timeframe.
Some charting software does not provide volume data for any specific period. Only daily volume data is available with them. This unavailability of volume data puts a restriction on VPT calculation over any period of time.
The VPT or PVT is calculated by multiplying the volume by the percentage change in the security’s price adding that to a cumulative total i.e. the previous day’s VPT.
For example, if the price goes up by 0.5% on 10000 shares, 50 will be added to yesterday’s VPT, because, 10000*0.050 = 50. If instead of going up, the price came down by 0.5% at the end of the day on 10000 shares, 50 would be deducted from the previous VPT value.
Interpretation of Volume Price Trend Indicator
The VPT can be interpreted in various ways. When volume supports the price movement, the trend remains valid. This can be easily seen.
Before moving further, we must keep in mind that the VPT follows only the closing price of a candle. Hence, all the highs and lows of a candle are not ref
The chart above shows the daily chart of Infosys. Below the price candle, the VPT indicator is there in the lower panel. From the first week of April, the price of INFY started coming down.
The drastic fall in price was well supported by the volume price trend indicator. A trader may enter short trades when the price action is supported by the volume price indicator.
But more than confirmation the traders look for divergence. If the price action and the volume price trend indicator is not in agreement with other regarding directions, a divergence occurs.
The divergence can be either bullish or bearish.
Let us look at the chart below. The price is making higher highs. A trend line shows that the price is trending upwards. But in the lower panel, the VPT tells us a different story. The VPT is making lower highs. It shows that the VPT is in disagreement with the price movement.
Volume being the prime factor behind any price trend, a divergence will ultimately lead the price to move in other way. A trader, after seeing this divergence, will not ride the wave and wait for the price to come down ultimately.
At the end, we can see the price comes down ultimately. The divergence is a clear warning sign. Traders look for these divergence signals.
Let’s now move to another example.
Shown below is a candlestick chart with price and VPT indicator. Two trend channels have been drawn. One on price and another on the VPT indicator.
The trend channel on price shows an upward sloping trend. It means the price is uptrending. But the channel below shows the volume price trend indicator on which the trend channel is slightly flat.
The slope of the two trend channels is not similar. This feature tells us about the divergence.
Though the divergence is not very strong. Divergence means a disagreement between price and volume price trend indicator. With such disagreement, it is accepted that the uptrend is weak and will not last.
Example of Volume Price Trend Indicator
The VPT indicator or the price volume trend indicator helps determine the trend strength of price.
In the following candlestick chart, we can see the daily chart of Bharat Heavy Electricals Ltd. The VPT indicator is shown in the lower panel of the chart window.
The VPT here is in agreement with the price movement of the stock. Therefore, there doesn’t exist any divergence.
Trading with the Volume Price Trend
Signal Line Crossover
We can use a signal line for creating trade signals. Using the moving average of the indicator, we can create a signal line.
If the VPT indicator goes over the line, we can use that as an entry point for a bullish trade.
And if the VPT indicator crosses the signal line from above, we can use that for a short trade or an exit from a bullish position.
We can use the price-VPT agreement as trend confirmation.
ADX with VPT
ADX indicator can be used in conjunction with VPT for trend confirmation. We will use moving average crossovers for trades in this case, as described below.
Trading with MA or EMA
We can use the moving average crossover for trade. For example, if a 20-day EMA crosses the 50-day EMA from below and the VPT also rises, we can use that as a bullish trade entry signal.
Read more: What is EMA?
A bearish trade can be taken if the 20-day EMA goes below the 50-day EMA line with a falling VPT.
On Balance Volume vs Volume Price Indicator
the OBV and VPT are similar indicators. But there is a slight difference. In OBV, a cumulative volume is added to the indicator, regardless of whether the price goes up by a point or by a large amount.
But in VPT, a small percentage of volume is added if the price change is small and a large percentage is added if the price change is large.
The price volume trend is quite important in determining a stock’s direction of movement or deciding a price trend. Price movement in conjunction with the change in volume proves to be a deciding factor.
For this reason, the price volume trend indicator (PVT) or the volume price trend indicator (VPT), which are the same indicator, plays a significant role in technical analysis.
The on-balance volume indicator and the volume price trend indicator are quite similar. But, as a cumulative volume is added in OBV, the VPT is considered to be more accurate. Because, as we explained earlier, in VPT a percentage of volume is added as per change in price.
A trader should keep the VPT in the technical indicators kit and use it as required.