A technical indicator that looks at the relationship between volume and price in an attempt to assess whether a trend will continue.
Overview
The Volume Price Confirmation Indicator (VPCI) was described in an article entitled, “Connection and Affinity; Between Price and Volume” by Buff Dormeier that was published in the July 2007 edition of Technical Analysis of Stocks and Commodities magazine.
According to Dormeier, the Volume Price Confirmation Indicator (VPCI) measures the intrinsic relationship between the prevailing price trend and volume. The price/volume relationship either confirms or contradicts the price trend. When volume increases, it confirms price direction; when volume decreases, in contradicts price direction.
Market volume typically represents the number of shares traded over a given period, however, since there is no central exchange in the FOREX marketplace to provide such information, FOREX volume is often measured as the number of price changes (a.k.a. ticks) in a given period at a given broker. While very different, both methods of calculating volume provide a measurement of market participation and interest in the given trading instrument.
“Volume proceeds price” has been a mantra of technical analysis for a very long time. In theory, increases in volume generally precede significant price movements. Dormeier concludes that when examining price and volume together, they give indications of supply and demand that neither can supply independently. The information the VPCI provides can be used to deduce the likelihood of a price trend continuing or reversing thereby helping a proficient investor to accelerate profits, reduce risk, and make better investment decisions.
The VPCI in the EUR/USD Daily Chart on 3/18/2011
Source: VT Trader
Interpretation
One of the simplest methods to generate potential trading opportunities is using VPCI and Smoothed VPCI crossovers. Potential buy signals are generated when the VPCI crosses above the Smoothed VPCI and potential sell signals are generated when the VPCI crosses below the Smoothed VPCI.
Dormeier also suggests using the VPCI as a confirmation filter in conjunction with other trend and/or price indicators. He explains that ”VPCI greater than zero shows whether the relationship between price trends and volume confirms or contradicts the price trend” and most importantly that “a rising or declining VPCI provides the trend direction, revealing the direction of the confirmation or contradiction.”
