Indicator: Volume Price Confirmation Indicator (VPCI)

The Volume Price Confirmation Indicator (VPCI) tool measures the relationship between price trends and volume to determine if a market move is supported by sufficient trading activity or is in a state of contradiction.

Usage

The VPCI is used to identify the health of a price trend by analyzing whether volume confirms or contradicts the price action. Traders typically look for the following scenarios:

• Trend Confirmation: When price is rising and the VPCI is rising, the uptrend is supported by volume (Greed with "fuel"). Conversely, when price is falling and the VPCI is falling, it indicates a market driven by fear with increasing energy, which is generally bearish until a reversal occurs.
• Trend Contradiction: An uptrend with a falling VPCI suggests a complacent market lacking the volume needed to sustain the move, often leading to a breakdown.
• Capitulation and Reversals: Using the Bollinger Bands feature, traders can spot extreme sentiment. If the VPCI falls below the lower standard deviation band and then forms a "V" shape to cross back above it, it may signal a selling climax or "heat death" capitulation, suggesting a potential bullish reversal.
• Zero-Line Crosses: Crosses above or below the zero line can serve as signals for changes in the volume-price relationship.

Details

Developed by Buff Dormeier, the VPCI was designed to reveal proportional imbalances between price trends and volume-adjusted trends. The indicator is constructed using three primary components:

1. Volume Price Cycle (VPC): The difference between a Long-Term Volume Weighted Moving Average (VWMA) and a Long-Term Simple Moving Average (SMA).
2. Volume Price Ratio (VPR): The ratio of a Short-Term VWMA to a Short-Term SMA.
3. Volume Multiplier (VM): The ratio of Short-Term Average Volume to Long-Term Average Volume.

The final VPCI value is calculated as: VPCI = VPC * VPR * VM. By multiplying these factors, the indicator amplifies price moves that occur on high relative volume while dampening moves that occur on low volume.

Settings

• Short Term: The lookback period for short-term moving averages (default is 5).
• Long Term: The lookback period for long-term moving averages (default is 20).
• Source: The price data used for calculations (typically the Close price).
• Draw MA on VPCI?: Toggles the visibility of a smoothing moving average on the VPCI line.
• VPCI MA Length: The period used for the VPCI smoothing moving average.
• Draw Bollinger Bands: Toggles the visibility of Bollinger Bands calculated based on the VPCI.
• Highlight Breaches: Enables visual markers (crosses) when the VPCI breaks outside of the Bollinger Bands.
• BB Length: The lookback period for the Bollinger Band basis.
• BB Multiplier: The standard deviation multiplier for the Bollinger Band width.

FAQ

What does it mean when VPCI contradicts the price trend? A contradiction occurs when price moves in one direction while VPCI moves in the opposite. For example, an uptrending price with a falling VPCI suggests the move is not supported by volume and may be nearing exhaustion.

How do Bollinger Bands help in interpreting VPCI? Bollinger Bands help identify statistical extremes in volume-price confirmation. A breach of the lower band followed by a recovery often indicates that selling pressure has been exhausted, signaling a potential reversal point.

How can I access the Volume Price Confirmation Indicator? You can get access on the LuxAlgo Library for charting platforms like TradingView, MetaTrader (MT4/MT5), and NinjaTrader for free.