Volume-Price Trend

Volume-price trend (VPT), sometimes known as price-volume trend, combines

price and volume in the market to form a hybrid trading indicator of the two
variables. The basic idea behind the indicator is to multiply the market’s volume
by the percentage change in the price over a given interval (usually daily). If price
declines, the indicator’s value goes lower due to the negative value. If price
increases, the indicator’s value goes higher.

VPT is conceptually very similar to on-balance volume (OBV). With on-balance

volume, the indicator increases or decreases based on whether price simply
made a new high or low. It does not include the extent of the move into its
calculation. With VPT, the indicator moves based on how big of a shift was made
in price.

The general premise behind VPT is that the indicator should move in the same
direction as price and largely match the magnitude of the move. It is generally
assumed that when price moves are accompanied by low volume, this puts a
market at risk for a reversal in trend.

For example, consider the following move in the S&P 500 in January 2018 below.
The market’s uptrend accelerated despite no conspicuous shift in volume. This
told many technical analysts that the move in the index was tenuous. Accordingly,
it set up a scenario where price could decline once more volume entered the
market. It eventually did exactly this.

VPT would have only picked up on what a pure volume indicator showed if volume had
been declining (given the price move is calculated into VPT). Therefore, the price move
largely matched with VPT.
Calculation of Volume-Price Trend
As mentioned above, VPT is measured as volume multiplied by the change in
price, and is calculated as a running total from the previous period.

VPT = Previous VPT + Volume x (Today’s Close – Previous Close) / Previous

Close

It is traditionally calculated daily, though it can be measured over whatever

timeframe with which volume data is available. Note that some charting software
platforms do not provide volume data on a timeframe lower than the daily level.
Therefore this can also restrict one’s ability to trade using the indicator over
multiple time intervals.

Interpretation of Volume-Price Trend

When traders look at VPT and how it relates to price they are fundamentally
looking for divergences. When there is a divergence between price and volume it
usually tells you something.

If volume stays flat, while price increases, this suggests to a trader that the up
move in price was relatively weak and may be prone to reversal. Accordingly, a
trader who observes this may be less likely to pursue long trades, expecting the
market to increase further.

Let’s take a look at the following example:

Here’s the type of divergence we might look for. Price increases, yet VPT actually
declined on net. This would imply the up move is fairly weak and may not last. And this is
what indeed happened. There was a subsequent drop in the overall market.

Let’s also look at this one:

This isn’t much, but it’s a slight divergence nonetheless. So we know that price
slightly increased while VPT stayed the same.

What does this mean?

It means that volume was the same but price still rose. If volume isn’t
accompanying the price this means it may be a weak move that may not hold.
Does this mean the bull market is running out of steam?

Well, not exactly, if we look at what price did afterwards.

You cannot trade off one indicator alone.

If we look at the chart below, we can see that peaks and troughs in price roughly
accord with the same in VPT. However, if we look close enough, we can still see
some divergences that are bearish in nature.

If we draw lines between closing prices and closing VPT values (VPT values
match with closing prices, not highs and lows of candles), we can see that price is
slanting up while the accordant VPT lines are flat to slightly pointing up as well.
This again means that volume-based analysis may imply that the up moves in this
market may be relatively weak. This makes bullish trades somewhat riskier than
they would be otherwise.

Trading With Volume-Price Trend

No indicator should be used independently to make trade decisions. This would
be a form of misuse. They are meant to help better guide trading decisions, or
better assist in finding entry points, rather than having one indicator as a
standalone system.

If we look at the following chart of Apple stock (AAPL), we see the following
divergences in price and VPT.

These are, like the previous examples shown above, bearish divergences. Price is
going up but the volume isn’t there to support the up move, as evidenced by VPT
declining in the first example. In the second divergence, VPT isn’t going up to the
same extent as price.

Would there be short trading opportunities here?

It depends on how you approach it. You can use fundamental analysis and/or go
further into technical analysis to better make a decision.

For example, let’s say you used a contrarian/price reversal indicator in addition to
VPT, such as Keltner Channels, with an average true range of 2.5.

Based on the bearish divergence signal from the VPT and upper touch of the channel, this
provides a potential shorting opportunity to consider where the red arrow is marked.

Conclusion
As its name suggests, volume-price trend blends both volume and price to form a cumulative
running indicator that gauges the perceived validity of price movements.

The key in valuing VPT in relation to price lies in divergences. If price moves in one direction or
another and isn’t matched by at least a concomitant increase in VPT, then traders may perceive
the price move as shallow and ripe for reversal.

Bullish divergences will see price going down with VPT up or at least flat. On the other hand,
bearish divergences will see price going up with VPT down or at least flat. Price that largely
matches up with VPT may help confirm any current trend in the market.