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Academy > Technical Analysis > What Is Volume-Price Trend? Bitcoin Trading With VPT >

What Is Volume-Price Trend? Bitcoin Trading With VPT

2022-08-18 02:41:00

Summary:

  • The Volume-Price Trend (VPT) (also known as Price Volume Trend) is a divergence indicator that detects price fluctuations based on volume, used to confirm trends. 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.
  • Hence, most traders use VPT for divergence trading. If the price of Bitcoin goes up, but the VPT indicator is going down, this indicates a potential bearish divergence. If the price is going down but the VPT indicator is not going down, this indicates potential bullish divergence.
  • As such, it can be useful for discovering entry/exit prices; if price bottoms out and reaches support levels we can open a long trade. If the price tops out and reaches resistance levels, we can open a short trade.

Price volume trend

What Is Volume Price Trend?

The Volume-Price Trend (VPT) indicator, sometimes called Price-Volume Trend (PVT), is a divergence indicator that detects price fluctuations based on volume. Volume is the cumulative sum of the amount of money flowing in and out of an asset. Volume spikes when people are overwhelmingly buying or selling Bitcoin. These spikes indicate trending markets.

For example, the indicator forecasts changing prices by tracking the inflow and outflow of money in Bitcoin. If the price of Bitcoin goes up, but the VPT index starts decreasing, this is indicative of bearish divergence. Bullish divergence can be identified when the price goes down but the indicator goes up, signaling perfect entry points.

According to the VPT, an 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. In other words, Bitcoin can go up in price but the price surge has to be matched with an increase in volume to sustain the trend and vice versa.

It can thus be useful for discovering entry/exit prices; if price bottoms out and reaches support levels we can open a long trade. If the price tops out and reaches resistance levels, we can open a short trade.

The VPT indicator is an oscillator-type indicator that appears underneath the Bitcoin chart. It is not range-bound which means it doesn’t measure support/resistance levels, nor does it detect overbought or oversold levels.

Similar indicators such as the On-Balance Volume (OBV) indicator can detect money inflows and outflows. However, the main distinction is that the VPT indicator is price-adjusted, whereas the OBV indicator is solely based on volume. To make it more effective, a trader could combine it with directional indicators such as the Average Directional Index (ADX) or a moving average such as the Simple Moving Average (SMA).

What Is The Volume-Price Trend Formula?

The VPT indicator calculates trends based on not just price change but percentage of price change. The formula is as follows, with VPT indicated as PVT here:

PVT formula

The “Close” takes values from the price of Bitcoin at midnight 00:00 UTC. If Bitcoin closes at $40,000 and a new daily candle starts, $40,000 would be the closing price. We would then subtract that from the previous daily close, divide it by this same previous daily close, and multiply this by volume. Add to this the VPT from yesterday, and you get the current VPT value.

The price-adjusted volume can only work if there are historic prices to compare to. If the current VPT equation result outpaces the previous result, the indicator rises. If the current VPT equation is lower than the previous result, it falls. This makes the indicator easy to read for trend confirmation and divergence trading.

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How to Use Volume-Price Trend Indicator? A Step-by-Step Guide

We’ll use the Phemex platform to show how the Volume-Price Trend indicator works via step-by-step instructions, using BTC as an example (again, note that the VPT is called PVT here):

  1. Head to “Markets” and choose BTC/USDT.
  2. Click on the “Indicator” dropdown at the top and search for “Price Volume Trend”:

PVT demo 1

PVT demo 2

Left-click on the indicator and voila! It’s now active underneath the Bitcoin chart as blue lines:

PVT demo 3

The only optional settings are visual settings because the formula is applied without n-periods. As it is not range-bound, the lines on the 1D (daily) chart will have different values from the 1H (hourly) chart. For example, the daily chart could have an upper limit of +4,000 and the weekly chart could have an upper limit of +10,000. The trader can derive context by zooming out and analyzing historic pattern.

How to Trade With the Volume-Price Trend Indicator? Volume-Price Trend Strategies

The VPT indicator is used for trend confirmation and divergence trading. We can use it to detect entry and exit prices for trend trading, or we can use it to identify divergence for day trading. The techniques laid out below can apply to Bitcoin and hundreds of other coins listed on the Phemex spot marketplace.

Entry and Exit Signals

An effective price volume trend strategy is to wait for the line to bottom out and open a long trade. The support levels are indicated based on areas where Bitcoin bounced in the past. As the values are not range bound, the numbers will vary for every chart. Here’s how the indicator could be used on the 1D (daily) Bitcoin chart:

PVT demo 4

The best entry price can be obtained when the oscillator reaches low support levels. Historically, it is difficult for Bitcoin to go below these levels because traders set up buy walls. The best exit price is when the indicator reaches resistance levels where it’s likely to have traders setting up sell walls.

Bitcoin could breach resistance levels and make a new all-time high or fall below support levels and sink to a new low, but it is most likely to trade within the middle range. A shrewd trader can patiently wait until one of these areas is triggered to get ideal entry and exit prices.  For example, they could enter when Bitcoin reaches support levels in the $30,000’s and exit when it reaches resistance in the $60,000s.

Divergence Trading

The VPT is an effective volume price trend divergence indicator. Divergence occurs when the price of Bitcoin moves in a different direction from the indicator. In 95% of cases, the indicator line moves identical to the price, but profitable opportunities arise when the two diverge because it indicates a price reversal.

If the Bitcoin price is going up but the indicator is going sideways or down, this indicates that a bearish divergence is on the horizon. If the price is going down, but the indicator is not following, we can expect bullish divergence. Here’s how the VPT indicator can be used for divergence trading on the 1D (daily) chart:

PVT demo 5

Using price volume trend analysis, a trader could open a long order when the price dropped from $67,000 down to $58,000 (15%) but the indicator didn’t budge–the price quickly recovered and Bitcoin went on to make a new all-time high at $69,000. We can also observe the same on a short-term chart such as the 30 minute chart:

PVT demo 6

Bearish divergence occurs when the indicator doesn’t make a new high after the price of Bitcoin appreciates. We can see how Bitcoin reached $43,000 on the chart which was higher than the last local high at $42,000, but the indicator did not surpass the previous high. This caused a divergence in price and we saw a breakdown in price.

How to Use VPT with Other Indicators?

The Phemex platform allows users to combine multiple indicators simultaneously. The most similar indicators to VPT are the On-Balance Volume (OBV) and the Average Directional Index (AVX) indicators. Using the step-by-step instructions laid out above, we can compare them on the daily chart:

PVT demo 7

To understand the current trend, read the price first and then analyze what the indicators are doing. The VPT and OBV indicators provide nearly identical values, but the OBV is slightly more volatile due to the lack of price adjustment. The ADX indicator is a directional indicator that indicates we’re currently trading at support levels and might see a bullish divergence.

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Conclusion

The VPT indicator can be used for trend-confirmation and divergence trading. Price volume trend analysis is effective because it measures both moving averages and volume. If we’re in a trending market and want to open a long trade, the VPT indicator can give us reassurance that the volume will match the price increase and the trend will continue.

However, the VPT indicator has limitations due to a lack of ranges. There are no upper or lower ranges, forcing traders to analyze historic values to discover these ranges. Therefore, it’s best to avoid using it in isolation and combine it with the Average Directional Index (ADI) or Relative Strength Index (RSI) to get context about the upper and lower barriers.

To learn more about indicators that can be used in combination with the Volume-Price Trend, visit our technical analysis (TA) section.


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