There are several volume related tools in forex but the volume price trend indicator is different as it does not only count for the volume rather it compares the volume with price. It is primarily used to determine the balance between a trading assets demand and supply. If the price of a trading instrument declines, the indicator’s value goes lower due to the negative value. If price increases, the indicator’s value will go higher.
What is the Volume Price Trend indicator?
The volume price trend indicator (VPT) helps to determine the direction of price of an asset and the strength of the change in price. The indicator consists of an accumulated volume range that adds or subtracts multiple changes in the price trend of a financial instrument. It depends on the current volume, depending on the upward or downward movement of the instrument.
The purpose of volume price trend indicator is to assess the balance between supply and demand for an asset. The percentage change in the price trend indicates a relative demand or supply of a particular asset, while the volume reflects the strength of the trend. The VPT ratio is similar to the on-balance volume (OBV) ratio in that it measures the total volume and provides the traders with cash flow information.
How to use the Volume Price Trend indicator?
The VPT indicator can be used in conjunction with moving averages and the ADX to find strength in market trends. For example, a trader may buy an asset if the 20-day moving average exceeds the 50-day moving average, and the VPT indicator goes up. Contrarily, the trader may decide to sell if the moving 20-day moving average is below the 50-day moving average, and the indicator is falling.
ADX also measures the current trends and can be used in conjunction with the VPT indicator to confirm that the market is in trend. ADX value above 25 indicate trend in the market, and value below 25 indicate a lateral change to the trend. As a result, retail traders can make a buy if the ADX is over 25, and the VPT line is rising. They can sell when the ADX is under 25, and the VPT line is falling.
Sellers can use the volume price trend indicator to detect technical divergence. The discrepancy occurs when the indicator makes a bottom, but the asset price results in making a top. Traders may consider placing a stop-loss order above or below the latest swing high or low.
Volume Price Trend trading strategy
The above section explains how the volume price trend indicator can be used in conjunction with other indicators. However, here we will look at a very simple trading strategy that does not contain any other indicator.
Volume Price Trend buy trade signal
- We can consider buying an asset if the VPT value starts rising from the bottom.
- We may look for bullish divergence for extra confirmation.
- The stop loss could be placed slightly below the swing low area.
- We could exit the trade if the price reaches a resistance area.
Volume Price Trend sell trade signal
- We could consider selling an asset if the VPT value starts falling from the top.
- We may look for bearish divergence for extra confirmation.
- The stop loss could be placed slightly above the swing high area.
- We could exit the trade if the price reaches a support zone.
Volume Price Trend conclusion
The volume price trend indicator tries to provide an overview of volume in relation to price. The basic idea behind the indicator is to multiply the market’s volume by the percentage change in the price over a given interval. If price declines, the indicator’s value will decrease due to the negative value. If price increases, the indicator’s value will increase. This makes it very easy to use for forex traders of all experience levels.
I would prefer to use the majority of technical indicators such as the volume price trend indicator on the 1-hour charts and above. I tend to find that these charts contain less market noise than the lower time frames and thus give more reliable signals for my forex trading strategies. This also means that I spend less time staring at charts and can also set alert notifications to let me know when price has reached certain levels or a particular indicator value has been reached.
The volume price trend indicator is just one indicator amongst thousands. I would not build a trading system alone, but rather combine with other technical indicators such as moving averages, Parabolic SAR, Stochastic Oscillator, RSI, ADX and price action analysis.
Of course, every trading system will generate false signals which is why money management is so important. I would personally be implementing sensible money management and only take traders that give me a favorable risk to reward ratio, ideally of at least 1:3. This means that one losing trade does not wipe out consecutive winners.
The methods of implementing the volume price trend indicator into a trading strategy that are outlined within this article are just ideas. I would always ensure that I have good money management, trading discipline and a trading plan when using any forex strategy.
Furthermore, I would combine multiple technical analysis, fundamental analysis, price action analysis and sentiment analysis to filter all entries. You should trade forex in a way that suits your own individual style, needs and goals.
If you would like to practice trading with the volume price trend indicator, you can open an account with a forex broker and download a trading platform. If you are looking for a forex broker, you may wish to view my best forex brokers for some inspiration.