Reprinted from Technical Analysis of STOCKS

& COMMODITIES magazine. 2007 Technical Analysis Inc., (800) 832-4642, http://www.traders.com
INDICATORS

Connection And Affinity

Between Price And Volume

Heres an indicator that can be used to measure the
intrinsic relationship between price and volume.

opinions, and emotions.

Market volume represents the number of shares
traded over a given period. It is a measurement of the
participation, enthusiasm, and interest in a given
security. Think of volume as the force that drives the
market. Volume substantiates, energizes, and empowers price. When volume increases, it confirms
price direction; when volume decreases, it contradicts price direction. In theory, increases in volume
generally precede significant price movements.
This tenet of technical analysis, that volume precedes price, has been repeated as a mantra since the
days of Charles Dow. Within these two independently derived variables, price and volume, exists an
intrinsic relationship. When examined together, price
and volume give indications of supply and demand
that neither could provide independently.

hen securities change hands on a securities auction market, the volume of

shares bought always matches the
volume sold. When the price rises, the
upward movement reflects that demand exceeds supply or buyers are in control. Likewise, when the price
falls it implies that supply exceeds demand or that
sellers are in control. Over time, these trends of
supply and demand form accumulation and distribution patterns. What if there were a way to look deep
inside price and volume trends to find out if current
prices were supported by volume? This is the objective of the volume price confirmation indicator (VPCI),
a methodology that measures the intrinsic relationship between price and volume.
DERIVING THE COMPONENTS
The basic VPCI concept is derived by examining the
VOLUME PRICE CONFIRMATION INDICATOR
difference between a volume-weighted moving avThe VPCI exposes the relationship between the pre- erage (VWMAs) and the corresponding simple movvailing price trend and volume, as either confirming ing average (SMA). These differences expose inforor contradicting the price trend. This gives an indica- mation about the inherent relationship between price
tion of possible impending price movements. In this and volume. Although SMAs demonstrate a stocks
article I will discuss the derivation and components changing price levels, they do not reflect the amount
of the VPCI and explain how to use it. I will also of investor participation. With VWMAs, however,
review comprehensive testing of the VPCI and present price emphasis is adjusted proportionally to each
further applications using the indicator.
days volume and then compared to the average
In exchange markets, price results from an agree- volume over the range of study. The VWMA is calcument between buyers and sellers despite their dif- lated by weighting each closing price with volume
ferent appraisals of the exchanged items value. compared to the total volume during the range:
One opinion may have legitimate fundamental
grounds for evaluation, while the other may be pure
Volume-Weighted Average =
nonsense. To the market, however, both are equal.
Sum {closing price (I) * [volume (I)/(total range)]}
Price represents the convictions, emotions, and
where I = given days action
volition of investors. It is not a constant, but rather
changed and influenced over time by information,
Heres an example of how to calculate a two-day
moving average using both the SMA and VWMA for
a security trading at $10 a share with 100,000 shares
by Buff Pelz Dormeier, CMT
changing hands on the first day, and at $12 a share

INDICATORS

& COMMODITIES magazine. 2007 Technical Analysis Inc., (800) 832-4642, http://www.traders.com
CMX Last-Daily 12/22/2006 C=57.000 -6.590 -10.36% O=63.710 H=65.290 L=63.630 V=4706108 buffwave(close,0,true,0)
54.835 MovAvg 1 line(close,9,0) 53.499

57
56
55
54
53
52
51
50
49
48
47

with 300,000 shares changing hands on the second

VPC =
day. The SMA calculation is day 1s price plus day
VWMA SMA
VWMA
2s price divided by the number of days, or (10+12)/
2, which equals 11. The VWMA calculation would
SMA
be day 1s price $10 multiplied by day 1s volume,
which is expressed as a fraction of the total range:
Price-volume
(100,000/400,000 = 1/4) plus day 2s price $12
momentum
multiplied by day 2s volume of the total range
Volume
2974800.00
expressed as a fraction (300,000/400,000 = 3/4),
3M
which equals 11.5 (2.5, day 1 + 9, day 2).
2M
The VWMA measures investor commitments ex1M
pressed through price, weighted by each days
corresponding volume, compared to the total volDec 4
11
18
25
ume over time. Thus, volume-weighted averages FIGURE 1: DIFFERENCE BETWEEN SMA AND VWMA. The result of this calculation provides
weight closing prices in exact proportion to the information about the relationship between price and volume.
volume traded during each time period.
We can begin investigating the VPCI keeping in mind how assume SMAs short-term average volume for 10 days is 1.5
VWMAs work. The VPCI involves three calculations:
million shares a day, and the long-term average volume for 50
days is 750,000 shares per day. The VM equals 2 (1,500,000/
1) Volume-price confirmation/contradiction (VPC+/-),
750,000). This calculation is then multiplied by the VPC+/after it has been multiplied by the VPR.
2) Volume-price ratio (VPR), and
Now we have all the information necessary to calculate the
3) Volume multiplier (VM)
VPCI. The VPC+ confirmation of +1.5 is multiplied by the VPR
VWMA: Volume-weighted moving average
of 1.25, giving 1.875. Then 1.875 is multiplied by the VM of
VPC(+/-): Volume/price confirmation/contradiction
2, giving a VPCI of 3.75. Although this number is indicative of
VPR: Volume/price ratio
an issue under strong volume-price confirmation, this informaVM: Volume multiplier
tion serves best relative to the current and prior price trend and
relative to recent VPCI levels. In Figure 2 you can see the four
The VPC is calculated by subtracting a long-term SMA from divisions of the price/volume relationship, and in Figure 4 you
the same time frames VWMA. In essence, this calculation is the can see the VPCI in action. Next, Ill discuss how to properly
otherwise unseen nexus between price and price proportion- use the VPCI.
ally weighted to volume. This difference, when positive, is the
VPC+ (volume-price confirmation), and when negative, the USING THE VPCI
VPC- (volume-price contradiction). This computation is the Price can be considered as the emotion, conviction, and voliintrinsic relationship between price and volume symmetrically tion of investors. Logically, you can define a price trend as the
distributed over time.
emotion, conviction, and volition of investors expressed over
The result is revealing. For example, a 50-day SMA might be time. Generally, a buyers underlying emotion or motivation is
$48.50, whereas the 50-day VWMA may be $50. The difference greed. Greed is the desire to obtain a profit. An uptrend could
of 1.5 represents price-volume confirmation (VWMA SMA) be viewed as an accumulation of greed over time.
(see Figure 1). If the calculation were negative, it would
Many times but not always an investor who creates
represent price-volume contradiction. This calculation alone supply, a seller, is motivated by the fear of losing value in his
provides purely unadorned information about the otherwise investment. Likewise, a downtrend would then be the accumuunseen relationship between price and volume.
lation of fear over time. We also spoke of volume as the force
The next step is to calculate the volume price ratio (VPR). that sustains price. A rising volume trend would represent a
VPR accentuates the VPC+/- relative to the short-term price- buildup in energy or fuel. A decrease in volume would then
volume relationship. The VPR is calculated by dividing the represent the loss of fuel nonworking energy or entropy.
short-term VWMA by the short-term SMA. For example, asGreed or an uptrend needs fuel to build and sustain itself.
sume the short-term time frame is 10 days, and the 10-day Greeds growth cannot be sustained without energy. An invesVWMA is $68.75, while the 10-day SMA is $55. The VPR would tor will lose interest and move on to better opportunities,
equal 68.75/55, or 1.25. This factor will be multiplied by the whereas an investor who is a seller maybe bearish or fearful,
VPC (+/-) calculated in the first step. Volume price ratios but not necessarily could be motivated by greed and sell,
greater than 1 increase the weight of the VPC+/-. Volume-price allowing participation in a more lucrative investment. Or the
ratios less than 1 decrease the weight of the VPC+/-.
seller could be motivated by greater emotions than greed, such
The third and final step is to calculate the volume multiplier as lust or personal responsibilities.
(VM). The VMs objective is to overweight the VPCI when
In such a case, the investor will sell his investment to buy
volume is increasing and underweight the VPCI when volume material pleasures or satisfy his responsibilities. In this way,
is decreasing. This is done by dividing the short-term average greed (bulls) need fuel (volume) to expand, but fear (bears) do
volume by the long-term average volume. As an illustration, not necessarily need volume to fall.

TRADESTATION PROSUITE

Reprinted from Technical Analysis of STOCKS

Reprinted from Technical Analysis of STOCKS

& COMMODITIES magazine. 2007 Technical Analysis Inc., (800) 832-4642, http://www.traders.com
Price contraction & volume contraction

Price expansion & volume expansion

Trend Up & Volume Rising
Greed w/ energy = Invigorated greed
Phase 1

Price
Volume

10
100

Strong demand

Phase 2

Phase 1

12
300

Price
Volume

VWMA = 0.25 * 10 + 0.75 * 12

VPC = 11.5 (VWMA) 11 (SMA)
Price trend + 2 (rising) VS VPC = +0.5 (rising)
Uptrend
confirmation

Bullish
Trend Up & Volume Falling
Greed w/ entropy = Complacency

Price
Volume

Phase 1

Phase 2

10
300

12
100

Weak demand

Bearish

12
300

Price expansion & volume contraction

10
100

Downtrend
contradiction

Bullish

Strong supply

Trend Down & Volume Rising

Fear w/ energy = Fear
Phase 1

Uptrend
contradiction

Phase 2

VWMA = 0.75 * 12 + 0.25 * 10

VPC = 11.5 (VWMA) 11 (SMA)
Price trend 2 (falling) VS VPC = +0.5 (rising)

Price
Volume

VWMA = 0.75 * 10 + 0.25 * 12

VPC = 10.5 (VWMA) 11 (SMA)
Price trend + 2 (rising) VS VPC = 0.5 (falling)

Weak supply

Trend Down & Volume Falling

Fear w/ entropy = Apathy

12
100

Phase 2

10
300

VWMA = 0.25 * 12 + 0.75 * 10

VPC = 10.5 (VWMA) 11 (SMA)
Price 2 (falling) VS VPC = 0.5 (falling)

Bearish

Downtrend
confirmation

Price contraction & volume expansion

FIGURE 2: FOUR DIVISIONS OF PRICE/VOLUME RELATIONSHIPS. Here you can see the characteristics of the different price/volume relationships that
is, price expansion and volume expansion; price contraction and volume contraction; price expansion and volume contraction; price contraction and volume
expansion.

CONFIRMING SIGNALS

CRL Last-Weekly 2/2/2007 C=45.960 -2.110 -4.39% 0=49.950 H=49.950 L=47.540 V=149200

54

Several VPCI signals may be employed in conjunction

50
with price trends and price indicators. These include a
46
VPCI greater than zero, which shows whether the
42
relationship between price trends and volume con38
firms or contradicts the price trend. More important, a
34
rising or falling VPCI provides the trend direction,
revealing the direction of confirmation or contradic30
tion. A smoothed volume-weighted average of VPCI,
26
called VPCI smoothed, demonstrates how much the
VPCI has changed from previous VPCI levels and is used VPCI band (5,true,25,1.5,-1.5,DarkGreen,Red)
0.00
to indicate momentum. Bollinger Bands may also be
-2.00
applied to the VPCI, exposing VPCI extremes.
-4.00
VPCI "V" bottom
Fundamentally, the VPCI reveals the proportional
imbalances between price trends and volume-adjusted
Apr Jul Oct 2004 Apr Jul Oct 2005 Apr Jul Oct 2006 Apr Jul Oct
price trends. An uptrend with increasing volume is a FIGURE 3: VOLUME PRICE CONFIRMATION INDICATOR (VPCI) V BOTTOM. When the VCPI falls
market characterized by greed supported by the fuel below the lower standard deviation of the Bollinger Band of the VCPI and then rises above the lower
needed to grow. An uptrend without volume is compla- band, it forms a V bottom.
cent and reveals greed deprived of the fuel needed to
sustain itself. Investors without the influx of other investors (capitulation). These occurrences may be visualized by the
(volume) will eventually lose interest, and the uptrend should VPCI falling below the lower standard deviation of a Bollinger
Band of the VPCI, and then rising above the lower band,
eventually break down.
A falling price trend reveals a market driven by fear. A forming a V bottom (Figure 3).
Its important to note when using the VPCI that volume leads
falling price trend without volume reveals apathy, fear without
or
precedes
price action. Unlike most indicators, the VPCI often
increasing energy. Unlike greed, fear is self-sustaining and
gives
indications
before price trends are clear. Thus, when a
may endure for long periods without increasing fuel or energy.
Adding energy to fear can be likened to adding fuel to a fire and
is generally bearish until the VPCI reverses. In such cases,
What if you could look inside price and
weak-minded investors, overcome by fear, become irrationally fearful until the selling climax reaches a state of maxivolume trends to find out if current
mum homogeneity. At this point, ownership held by weak
prices were supported by volume?
investors has been purged, producing a type of heat death

Reprinted from Technical Analysis of STOCKS

& COMMODITIES magazine. 2007 Technical Analysis Inc., (800) 832-4642, http://www.traders.com

INDICATORS

TM Last-Weekly 2/16/2007 C=136.770 +11.900 +9.53% 0=124.790 H=124.790 L=123.620 V=562800

140
130
120
110

100
Uptrend
VPCI signal is given in an unclear price trend, it is
confirmation
Uptrend
Downtrend
90
contradiction Downtrend contradiction
best to wait until one is evident.
confirmation
80
At point 1 in Figure 4, Toyota Motor (TM) is
Uptrend confirmation
2.50
breaking out of a downtrend and the VPCI confirms VPCI band (5,true,3,2,DarkGreen,Red) 0.42 1.07
1.50
VPCI warning signal
this breakout immediately as the indicator rises, Downtrend
contradiction
0.50
1
crossing over the VPCI smoothed and then the zero
2
3
Zero line -0.50
bullish
line. This is an example of VPCIs bullish confir- Volume 2137390.00 VPCI
indication
VPCI "V" bottom VPCI bullish
3.5M
confirmation
mation of a price trend. Later, the VPCI begins to
2.5M
1.5M
fall during the uptrend, suggesting complacency.
Apr May Jun Jul Aug Sep Oct Nov Dec 2006 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2007 Feb
By point 2, the VPCI crosses under the VPCIsmoothed warning of a possible pause within the FIGURE 4: PUTTING IT ALL TOGETHER. Here you see an example of the VPCI in action. See Figure
new uptrend. This is a classic example of a VPCI 2 for details.
bearish contradiction. Before we reach point 3, the
VPCI makes a pattern forming a V bottom. This is a bullish VPCI smoothed. OBV crossovers of OBV smoothed would give
sign, often indicating the selloff has washed out many of the indications of OBV rising relative to previous OBV levels.
sellers. At point 3, the VPCI confirms the earlier bullish V Remember, VPCI is designed for application in a trending
pattern with a bullish crossover, leading to a strong bull rally. market, with a trending indicator. Thus, we need two additional tools to complete this test.
First, well need an indicator to verify whether we are in a
VPCI VS. OTHER PRICE
trending market. A seven-period average directional moveVOLUME INDICATORS
ment index (ADX) indicator fulfills this criterion by indicating
The most acclaimed price volume the intensity of the trend. Next, we will need a trend indicator
indicator to compare to the VPCI is to show the trends direction. The moving average converJoseph Granvilles original on-bal- gence/divergence (MACD) with the traditional (12, 26, 9) setance volume (OBV) indicator. Rec- tings was used to provide buy entry signals for this test. Finally,
ognizing volume as the force behind we will need a test subject, which illustrates how these indicators
price, Granville created OBV by assigning up days as positive work across a broad market. I applied it to the SPDR Standard &
volume (measured by an up close) and then subtracting volume Poors 500 exchange traded fund (SPY). See Figure 5.
on down days. OBV is price-directed volume, the accumulation
The testing period was conducted from inception (February
of +/- volume flows based upon price direction. Granvilles 1993) until the end of 2006. Standard specifications were used
objective with on-balance volume was to uncover hidden coils on both indicators (OBV 28 day and VPCI 7/28 [seven-day
in an otherwise noneventful, nontrending market. With his short-term trend and (5)(4)-day long-term trend]). Results
OBV indicator, Joe Granville became a renowned market were not optimized in any way.
strategist. In so doing, he popularized OBV and the wisdom of
In this system, long positions are taken only when these
using volume in securities analysis.
conditions are met when accompanied by OBV crossovers in
The VPCI differs from OBV in that it calculates the propor- the first test, or by VPCI crossovers in the second. Long
tional imbalances between price trends and volume-weighted positions are exited with crossunders of OBV smoothed in the
price trends. This exposes the influence volume has upon a first test or with VPCI crossunders in the second study. Alprice trend. Although both contain volume-derived data, they though this test was created for both observational and creditconvey different information. In composition, the VPCI is not ability purposes, the results are stunning.
an accumulation of history like OBV but a snapshot
of the influence of volume upon a price trend over
122
a specified time. This enables the VPCI to give
120
faster signals than accumulation indicators similar
118
to an oscillator. In contrast to OBV, the VPCIs
116
objective is not to uncover hidden coils in trendless
VPCI
114
sell
VPCI buy
VPCI (5,true,3,2,DarkGreen,Red) 0.4610 -0.2539
markets, but to evaluate the health of existing
-0.15
trends.
SPY Last-Daily 4/22/2005 C=114.953 -32.277 -21.92% O=148.220 H=148.620 L=147.044 V=124128536

-0.35

COMPARING VPCI TO OBV

The most general VPCI buy signal is when the VPCI
crosses above the VPCI smoothed in an uptrending
market. This indicates the VPCI is rising relative to
previous VPCI levels. The traditional OBV does not
have a lagging trigger like the VPCI smoothed, so
I amended the OBV by adding an additional eightperiod simple moving average of OBV. The net
effect gives OBV a corresponding trigger to the

MACD buy

MACD (12,26,9) -1.05 -0.90 -0.15

0.60
0.00
-0.60

OBV sell 1.9M

On-balance volume SM 1631285632.00 1690542464.00

OBV buy

48.0
36.0

ADX (7) 45.95

ADX>30

24

31 Feb 7

14

21

28 Mar 7

14

21

28

1.7M
1.5M

Apr

11

18

FIGURE 5: VPCI/ON-BALANCE VOLUME (OBV) COMPARISON. Here you see the VPCI compared
to the OBV, the seven-period ADX, and the MACD.

Reprinted from Technical Analysis of STOCKS

INDICATORS

& COMMODITIES magazine. 2007 Technical Analysis Inc., (800) 832-4642, http://www.traders.com
Strategy*

Annual
return

Time
invested

Std dev

5-yr % Profitable Profit

Sharpe
factor
ratio

The results of this test are displayed in Figure 6.

Buy-Hold 9.94%
100.00%
17.75%
0.10
N/A
N/A
MACD
-3.88%
24.79%
13.03%
0.27
41.79%
0.97
Excluding dividends or interest, OBVs annualized
VPCI
8.11%
35.63%
7.42%
0.74
65.15%
2.47
rate of return in the above system was -1.57%, whereas
OBV
-1.57%
27.02%
17.40%
0.05
42.86%
1.00
the V PCI s annualized return was 8.11%, an
*Dividends not included
outperformance of over 9.5% annualized. The VPCI
improved reliability, giving profitable signals over FIGURE 6: COMPARING RETURNS OF DIFFERENT STRATEGIES. The results of applying the
65% of the time, compared to OBV at only 42.86%.
various indicators are compared here. You can see the annual return of applying the VPCI is more
Another consideration in evaluating performance favorable than the returns of the other strategies.
is risk. The VPCI had less than half the risk as measured by
volatility, 7.42 standard deviations compared to OBV with
Strategy* 1993 1994 1995 1996 1997 1998
1999
17.4 standard deviations from the mean. It is not surprising
Buy-Hold
3.61
-2.21 34.95
20.1 31.44 27.04 19.11
the VPCI had much better risk-adjusted rates of return. The
MACD
0.31
5.42
0.88 12.63 14.72 -12.93
-30.6
VPCI
2.93
6.42
6.12 19.83 19.09
8.9
3.17
VPCIs Sharpe ratio from inception was 0.70 and had a profit
OBV
-1.03
-1.24
0 18.81
7.3 12.4 -12.43
factor of 2.47, compared to OBV with a -0.09 Sharpe ratio
and a profit factor of less than 1.
Strategy* 2000
2001 2002 2003
2004 2005
2006
Admittedly, this testing environment is an uneven match.
Buy-Hold -10.68 -12.87 -22.81 26.12 8.62 3.01 13.74
The VPCI uses information from volume-weighted prices to
MACD
9.27 11.12
0.9
1.34
1.8 1.69 -11.32
VPCI
-2.71 21.28 -0.65
10.4 4.27
4.8
9.29
gauge the health of existing trends, whereas OBV accumulates
OBV
-26.55 -28.34 12.45 -12.79 33.32 -15.58
-8.33
volume flows as directed by price changes to uncover hidden
*Annual rates of return without dividends
coils. Thus, the conditions setup in this system, a trending
market with apparent price direction, is one in which the VPCI
FIGURE 7: ANNUAL RETURNS. Here you see the annual returns of the various
strategies from 1993 to 2006. Note that the worst annualized VPCI return was only
is designed to succeed. Although OBV was not necessarily set
2.71%.
up for failure either, this study does illustrate how less-savvy
practitioners often fail to use the indicators information correctly or coordinate the indicators properly.
calculation. This would lower the price stop when price and
What if an investor had just used the MACD buy & sell volume are in confirmation, increasing the probability of
signals within this same system without utilizing the VPCI keeping an issue under accumulation. However, when price
information? The investor would have lost out on nearly 12% and volume are in contradiction, dividing the stop-loss by the
annualized return, the difference between the VPCIs positive VPCI would raise the stop price, preserving more capital.
8.11% versus the MACDs negative -3.88% rate of return while Similarly, using VPCI as a multiplier to other price, volume,
significantly increasing risk. What if this investor had just and momentum indicators may not only improve reliability but
employed a buy & hold approach? Although this investor increase responsiveness as well.
would have realized a slightly higher return, he or she would
have been exposed to greater risks. The VPCI strategy returned NOW THAT YOUVE DUG DEEP
nearly 90% of the buy & hold strategy return while avoiding The VPCI reconciles volume and price as determined by each
about 60% less risk as measured by standard deviation.
of their proportional weights. This information may be used to
Looking at risk-adjusted returns another way, the five-year deduce likelihood of a current price trend continuing or reversSharpe ratio for the SPDR was only 0.1 compared to the VPCI ing. This study demonstrates that adding the VPCI to a trendsystem of 0.74. In addition, the VPCI investor would have been following system resulted in improved performance across all
invested only 35% of the time, allowing the investor the major areas measured. In the hands of a proficient investor, the
opportunity to invest in other investments. During 65% of the volume price confirmation indicator provides information
time the investor was not invested, he or she would have only useful in accelerating profits, reducing risk, and empowering
needed a 1.84% money market yield to exceed the buy & hold the investor toward sound investment decisions.
strategy. Moreover, this investor would have experienced a
much smoother performance, without such precipitous capital Armed with his proprietary indicators and investment prodrawdowns. The worst annualized VPCI return was only a grams, Buff Pelz Dormeier now advises and manages portfolios
measly -2.71% compared to the underlying investments worst for both individual and institutional clients at Wachovia Secuyear of -22.81%, more than 20% difference in the rate of rities. He may be reached at Buff.dormeier@wachoviasec.com.
return! (See Figure 7.) If an investor had invested in a moneymarket instrument, while not invested in the SPDR, this VPCI The original version of this work was awarded the 2007
Charles H. Dow Award, sponsored by the Market Technicians
strategy would not have experienced a single down year.
Association, as the research paper that broke new ground or
made innovative use of established techniques for the year.
OTHER APPLICATIONS
The raw VPCI calculation may be used as a multiplier or divider Congratulations, Buff!
in conjunction with other indicators, such as moving averages,
momentum indicators, or price and volume data. If an investor See our Traders Tips area at http://www.traders.com/Documentahas a trailing stop-loss order set at the five-week moving tion/FEEDbk_docs/Archive/072007/TradersTips/TradersTips.html
for program code implementing Buff Dormeiers technique. S&C
average of the lows, you could divide the stop price by the VPCI