Volume Price Trend Indicator (VPT)
Candlefocus EditorVPT is an indicator that combines the volume with price. It measures the relationship between the total trading volume of a security and its price movements. By doing this, it helps traders identify possible trend changes and measure Buying or Selling pressure.
The basic equation for what is commonly known as the Volume Price Trend indicator is: VPT = (CP(n) x V(n)) – (CP(n-1) x V(n-1))
Where: CP(n) = Closing Price at time period n V(n) = Volume during time period n
The resulting figure will be either a positive or negative number. When the indicator is positive, it suggests that the buying pressure of the security has increased. When the indicator is negative, it suggests that the selling pressure has increased.
In technical analysis, the VPT indicator is used to detect trend changes and measure trend strength. It is also used to predict future prices. By studying the VPT, traders may be able to predict the directional movement of a security, thereby helping them make an informed decision on when to enter or exit a trade.
For example, when the VPT falls dramatically in a short time period, it could signify the late stage of a bearish trend as the buying pressure has weakened significantly. On the other hand, if the VPT rises quickly, it could suggest the beginning of a bullish trend as the buying pressure has become stronger.
Traders can also use the VPT to detect capital inflows and outflows. When the VPT is positive over a period of time, it could mean that money is flowing into the security. Similarly, when the VPT is negative, it could indicate that money is being pulled out of the security.
In conclusion, the Volume Price Trend Indicator is a powerful tool that helps traders detect buying and selling pressures, trend changes, and capital flows. By studying the VPT, traders may be able to make sound trading decisions as well as predict future prices.