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Technical Analysis, Studies, Indicators:

Volume-Price Trend (VPT)


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Description: Volume-Price Trend in technical analysis to build trading systems and generate trading signals on the base of the Money Flow analysis.

Description

Volume-Price Trend (in some sources also referred as to Price-Volume Trend) could be called as cumulative Percentage Force Index (Force Index that uses percentage price change instead of price change in calculation). Because of its cumulative nature, the Volume-Price Trend (VPT) is quite similar to OBV (on balance volume) and the same as OBV it is used in technical analysis to analyze volume flow (money flow).

VPT oscillates around zero line, however, depending on calculation's start point it may run into periods when it could fluctuate in positive or negative area for a prolonged period of time. Because of that main focus in technical analysis is on a VPT direction. Advancing Volume-Price Trend readings is a sign of bullish sentiment when bigger part of volume is traded to the price up-side and declining Volume-Price Trend readings would suggest dominance of bearish sentiment when main volume is traded to the price down-side.

Analysis, Signals, Trading Systems

In technical analysis Volume-Price Trend indicator is used mainly on the longer-term frames. Due to its cumulative nature it becomes difficult to analyze VPT on the short-term and intraday charts when VPT changes could be relatively small in relation to the actual VPT value. This is a common problem for all volume based technical indicators that have cumulative element in their calculations. In order to somehow simplify analysis based on the VPT indicator it could be recommended using Moving Average (MA) applied to VPT as a signal line. In this case, VPT readings below its signal line would point to negative money flow (selling pressure) and VPT readings above its signal line would point to the positive money flow (buying pressure).

Chart 1: DJI chart Volume Price Trend (blue line) and its Signal Line (red line)

DJI chart - Volume-Price Trend

On the DJI (Dow Jones Industrials) chart above (Chart 1) you may see an illustration of simple trading system's rules based on the crossovers of VPT and its Signal Line (EMA applied to VPT):

  1. Buy when VPT crosses its Signal Line and starts to move above it.
  2. Buy when VPT crosses its Signal Line and starts to move below it.

Formula and Calculations

The Volume-Price Trend is calculated as running cumulative sum of volume multiplied by percentage price change:

  1. Calculate Percentage Force Index as Force Index where volume is weighted by percentage price change instead of price change:

    PFI = Volume * (Close - ClosePrev) / ClosePrev
  2. Calculate Volume Price Trend as running cumulative sum of Percentage Force index:

    VPT = VPTprev +FPT
  3. Apply Exponential Moving Average to Volume-Price Trend as a signal line:

    Signal Line = EMA(VPT, n)

    where n is bar period of EMA

By for MarketVolume.com

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