Price Volume Trend combines percentage price change and volume in an attempt to confirm the strength of price trends or through divergences, warn of weak price moves. Unlike other price-volume indicators, the Price Volume Trend takes into consideration the percentage increase or decrease in price, rather than just simply adding or subtracting volume based on whether the current price is higher than the previous day’s price. How the formula is calculated is presented below:
The Price Volume Trend may be helpful in seeing divergences; examples of these divergences are shown below in the chart of AT&T (T):
The Price Volume Trend indicator might be interpreted as follows:
High #1 to High #2
AT&T stock made lower highs, but the Price Volume Trend indicator made higher highs. This bullish divergence warned that bulls might be taking control of the stock and shorting AT&T might not be advisable.
Since the Price Volume Trend indicator multiplies positive volume when prices close higher than the previous day’s close, the Price Volume Trend indicator could be interpreted as meaning that more volume flowed into High #2 than flowed into High #1. More volume interest by buyers at High #2 signaled that the price move higher had significant strength behind it and it may continue.
Low #1 to Low #2
The stock price made higher lows, generally considered a bullish signal; the Price Volume Trend indicator confirmed this move higher when it made higher highs as well.
Price Volume Trend is a valuable technical analysis tool that combines both price and volume and attempts to confirm price action or warn of potential weakness or lack of conviction by buyers and sellers. Other similar indicators that should be investigated further are the Chaikin Oscillator and the Money Flow Index.
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