What it means
Plain trading volume tells you how many shares changed hands, but not whether the activity was driven by buyers or sellers. The VPT indicator solves this by weighting each day's volume by how much the price moved.
A large price rise on heavy volume adds a lot to the total, while a small price fall on light volume subtracts only a little. The calculation starts from a base value, often zero, and updates each day.
The change in price is expressed as a percentage of the previous close, and this percentage is multiplied by the day's volume. The result is added to or subtracted from the running total.
This makes VPT a close relative of on-balance volume, but a more refined one. On-balance volume adds the whole day's volume on up days and subtracts it on down days, no matter how small the price change.
VPT, by contrast, gives a tiny move a tiny effect and a large move a large one. Analysts read the line in two ways.
A rising VPT alongside a rising price suggests that the trend is supported by genuine buying, while a falling VPT during a rally suggests the rise lacks support. When price and VPT point in opposite directions, this divergence can be an early warning of a reversal.
The absolute number is not meaningful by itself, because it depends on where the series started and on the volume of the particular security. What matters is the direction and the slope of the line.
Comparisons between different shares should be made carefully. Like all indicators, VPT has limits.
It relies on accurate volume data, can be distorted by one-off events such as index rebalancing, and does not predict the future. It is best used with other tools rather than alone.
In practice
Real-world examples.
Example
A portfolio manager notices that a retailer's share price has hit a new high, but the VPT line has been falling for two weeks. She reads this as a sign that the rally lacks real buying and trims her holding. The share falls back about 8% the next month.
Example
A trader looking at a pharmaceutical stock sees price and VPT both climbing steadily. The agreement between the two reassures him that the uptrend has support, and he holds his position with a trailing stop.
Example
An analyst at a brokerage compares VPT with on-balance volume on a volatile mining share. She notes that VPT shows a smaller rise because many of the up days had only tiny price gains, which on-balance volume treats as full-volume buying.
Formula
Calculation
VPT today = VPT yesterday + Volume today x ((Close today - Close yesterday) / Close yesterday)
Start with VPT of 0. On day one, a stock closes at $51, up from $50, on volume of 200,000 shares. The price change is ($51 - $50) / $50 = 2%, so VPT = 0 + 200,000 x 0.02 = 4,000. On day two, it closes at $50.49, down from $51, on volume of 100,000. The price change is ($50.49 - $51) / $51 = -1%, so VPT = 4,000 + 100,000 x (-0.01) = 4,000 - 1,000 = 3,000.Case study
Seen in the real world.
Northgate Securities is an illustrative, fictional brokerage that provides charting tools to its clients. A product manager wanted to know whether adding the VPT indicator to the platform would help customers.
The team tested it on a year of daily data for 50 shares. In cases where price rose to new highs while VPT fell, the share declined by an average of 4% over the following month, while in cases where the two moved together, the shares rose on average by 2%.
The team cautioned that the sample was small and that past patterns may not repeat. The illustrative decision was to add VPT to the platform with a clear note that it is a supporting tool, and to offer a short guide on divergences.
Watch out
Common mistakes.
- Reading the absolute VPT number as meaningful, when only its direction and slope against price are useful.
- Using VPT on thinly traded securities, where volume data is unreliable and one trade can distort the line.
- Confusing it with on-balance volume, which adds or subtracts the full volume regardless of the size of the price change.
Questions
People also ask.
What does VPT stand for?
It stands for Volume Price Trend, a running total of volume weighted by percentage price change.
How is it different from on-balance volume?
On-balance volume uses full volume for any up or down day, while VPT scales volume by the size of the price move.
Can it predict price?
No, it only describes past activity, though divergences between price and VPT may hint at weakening trends.
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