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. Any uptrend must be matched with increased volume to sustain the trend or the price breaks down. Similarly, a downtrend must be matched with a volume decrease or the price reverses to the upside.
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 VPT 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.
Signal Line Crossovers: A signal line, which is just a moving average of the indicator, can be applied and used to generate trading signals. For example, a trader may buy a stock when the VPT line crosses above its signal line and sell when the VPT line passes below its signal line.
Divergence: Traders can use the VPT indicator to spot technical divergence. Divergence occurs when the indicator makes a higher high or a lower low, but the security’s price makes a lower high or a higher low. Traders should place a stop-loss order above the most recent swing high or below the most recent swing low to minimize risk.
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.
VPT 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.
VPT 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.
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. The volume price trend (VPT) indicator helps determine a security’s price direction and strength of price change.
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