- Volume Price trend is a technical indicator used for analysing the stock market.
- Similar to the OBV, this indicator is also based on the volume of the stock traded.
- The indicator consists of a cumulative volume line that adds or subtracts a multiple of the percentage change in price and the current volume.
Formulae for Volume Price trend indicator:
VPT = VPT(prev) + (% change in price * volume), if price > price(prev)
VPT = VPT(prev) – (% change in price * volume), if price < price(prev)
This is the 1 day chart of Infosys Ltd (NSE) around Dec, 2019 to Aug, 2020
- The VPT indicator is used to analyse the balance between the supply and demand of a particular stock.
- The percentage change in price depicts the relative supply or demand and the volume of stock traded depicts the strength of the trend. In fact, it acts as a force behind the trend.
- The VPT indicator alone is of not much use. Hence it must be used in conjunction with few other lines or signals.
- Traders can add a signal line which is just the moving average of the indicator.
- If VPT crosses above the line, traders can buy the stock and vice-versa.
- Similarly, VPT indicator can be used along with 20 and 50 day moving averages.
- If the 20-day moving average is higher than the 50-day moving average and the VPT is rising, it acts as a buy signal and vice-versa.
- Traders can also use the VPT indicator to spot the technical divergence.
- Divergence occurs when the indicator makes a higher high or a lower low but the price makes a lower high and a higher low.
- Traders can minimize the risk by placing a stop loss order above the recent high swing or below a recent low swing.