Volume Accumulation Percentage (VAP) – Rules, Strategy, Settings, Returns, Performance

In technical analysis of the financial markets, volume indicators serve as a valuable tool for evaluating the level of activity in a market to ascertain the force behind a price move — one such volume indicator is the Volume Accumulation Percentage (VAP). What do you know about this indicator?

The Volume Accumulation Percentage (VAP) indicator is a variation of the classical volume-accumulation indicators, especially the Chaikin Money Flow. Essentially, it is the Chaikin Money Flow (CMF) expressed as a percentage because, as per the formula, it is the CMF multiplied by 100. They are derived by dividing the sum of price-adjusted volumes over a given period by the sum of the volumes over the same period. In the case of the VAP, that result is multiplied by 100.

In this post, we will take a look at most of the questions you may have about the VAP indicator: what it is, how it works, and how you can use it to improve your trading strategies. Let’s dive in!

Key takeaways

• Definition and Formula:
• The Volume Accumulation Percentage (VAP) is a variation of volume-accumulation indicators, like the Chaikin Money Flow (CMF).
• It is essentially the CMF multiplied by 100, expressed as a percentage.
• Formula: Sum of price-adjusted volumes over a period divided by the sum of volumes over the same period, multiplied by 100.
• Relationship to Accumulation/Distribution:
• Both VAP and CMF are modifications of the accumulation/distribution concept.
• They weight volume based on where the price closes relative to the period’s price range (e.g., daily bars).
• Weighting Mechanism:
• Positive weights: Assigned when the price closes above the midpoint of the range.
  • Maximum weight (100%) at the day’s high.
  • Zero weight at the midpoint.
• Negative weights: Assigned when the price closes below the midpoint.
  • Maximum negative weight (100%) at the day’s low.
  • Zero weight at the midpoint.
• Signal Types:
• Zero line crossover: Indicates shifts in buying or selling pressure.
• Divergence signals: Highlight discrepancies between price movement and buying/selling pressure.
• We show you a complete Volume Accumulation Percentage (VAP) trading strategy complete with trading rules.
• If you want to look at other indicators, please read our take on the top 20 trading indicators.

What is the Volume Accumulation Percentage (VAP) indicator?

The Volume Accumulation Percentage (VAP) indicator is a variation of the classical volume-accumulation indicators, especially the Chaikin Money Flow. Essentially, it is the Chaikin Money Flow (CMF) expressed as a percentage because, as per the formula, it is the CMF multiplied by 100. They are derived by dividing the sum of price-adjusted volumes over a given period by the sum of the volumes over the same period. In the case of the VAP, that result is multiplied by 100.

They are both a modification of the accumulation distribution, which assigns weight to the volume based on where the price closes relative to the period’s price range. The period here refers to a price bar. So, for a daily timeframe, the weight is assigned based on where the price closed relative to the day’s price range. Any close above the midpoint assigns a positive weight to the volume — at the day’s high, the volume is assigned the maximum weight (1 or 100%), and at the midpoint, zero.

Likewise, any close below the midpoint assigns a negative weight to the volume — at the low of the day, the volume is assigned the maximum weight (1 or 100%), and at the midpoint, zero.

The indicator generates two main types of signals — the zero line crossover and the divergence signals — which can be used to gauge the level of buying pressure (accumulation) or selling pressure (distribution) in the market.

This is what VAP indicator might look like on a chart (see lower pane):

Volume Accumulation Percentage (VAP) trading strategy – rules, backtest, returns, and performance

Let’s backtest a Volume Accumulation Percentage (VAP) trading strategy that is complete with trading rules.

We make the following trading rules:

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We backtest the ETF that tracks the gold price: GLD. Commissions and slippage are set to 0.03% for each trade (0.06% for a roundtrip).

We get the following equity curve from its inception until today:

Trading statistics and performance:

• Number of trades: 82
• Average gain per trade: 1.8%
• Annual returns (CAGR): 6.8%
• Win rate: 58%
• Time spent in the market: 50%
• Risk-adjusted return: 13.7%
• Max drawdown: 26%

This is the code we used for the backtest (Amibroker):

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How does the Volume Accumulation Percentage (VAP) work?

The Volume Accumulation Percentage (VAP) works as a price-adjusted volume metric to measure the level of accumulation (bullish pressure) or distribution (bearish pressure) in the market. It is the ratio of the sum of price-adjusted volumes to the sum of the volumes over a given period expressed in percentage.

The price-adjusted volume is weighted by the proximity of each price bar’s closing price to the bar’s price range. Any close above the bar’s midpoint assigns a positive percentage weight to the volume, as the volume is considered to have a bullish effect. Likewise, any close below the midpoint assigns a negative percentage weight to the volume, as the volume is considered to have a bearish effect. A close at the midpoint assigns a weight of 0% to the volume. When the price closes at the bar’s high, 100% of the weighted volume is considered bullish volume, and when it closes at the bar’s low, 100% of the weighted volume is considered bearish volume.

The readings of the indicator reflect accordingly, as it generally generates two types of signals — the zero-line crossover signal and the divergence signal. When the indicator crosses above the zero line, it gives a positive reading, suggesting the presence of bullish pressure in the market. When the indicator crosses below the zero line, it gives a negative reading, indicating there is bearish pressure in the market.

Also, a bullish divergence, which occurs when the price is making lower lows but the indicator is making higher lows, suggests buying pressure, while a bearish divergence, which occurs when the price is making higher highs but the indicator is making lower highs, suggests selling pressure.

What does the Volume Accumulation Percentage (VAP) measure?

The Volume Accumulation Percentage (VAP) measures the level of accumulation or buying pressure and distribution or selling pressure in the market. It uses the percentage ratio of the sum of price-adjusted volumes to the sum of the volumes over a given period to estimate whether the activity in the market supports buying pressure or selling pressure.

The price-weighted volume uses the location of the closing price relative to the bar’s high and low such that any close above the bar’s midpoint assigns a positive percentage weight to the volume and any close below the midpoint assigns a negative percentage weight to the volume — a close at the midpoint assigns a weight of 0%, while a close at the high or low assigns + or – 100% to the volume respectively.

This way, it reads positive volume when the market is in the accumulation phase, signaling buying pressure, and negative volume when the market is distribution phase, which signals selling pressure.

Why is Volume Accumulation Percentage (VAP) important for traders?

The Volume Accumulation Percentage (VAP) is important for traders because it shows when the market is in the accumulation or distribution phase. The indicator assigns volume a bullish or bearish value based on where the price closed relative to the bar’s high and low.

It helps traders to know when there is bullish pressure in the market so they can look for buying opportunities and when there is bearish pressure so they can look for selling opportunities.

How is Volume Accumulation Percentage (VAP) calculated?

The Volume Accumulation Percentage (VAP) is calculated using this formula:

VAP = 100 x TVA/TV

Where:

TV is the total volume, and it is given as: TV = Sum (Volume, n)

TVA is the total adjusted volume and is given as:

TVA = Sum (Volume x P, n)

Where:

n = period length of the indicator

P is the location of the closing price in a price bar and is given as:

P = (2 * Close — High — Low) / (high — low) or P = [(Close — Low) — (High — Close)] / (High — Low)

What does a high Volume Accumulation Percentage (VAP) value indicate?

A high Volume Accumulation Percentage (VAP) value indicates that the price has been closing around the high of the price bars in recent times. How you interpret this will depend on what the price is doing. If the price is in a consolidation, it means the market is accumulating, and a breakout to the upside may be anticipated in the near future.

On the other hand, if the price is already trending upward, the reading shows that the trend is healthy, as it is in sync with the indicator.

How can traders use the Volume Accumulation Percentage (VAP) in their strategy?

To use the Volume Accumulation Percentage (VAP) in their strategy, traders have to learn how the indicator works and then use it to formulate a reliable trading strategy with clear entry and exit points. They can combine it with other indicators or other forms of technical analysis.

For instance, they can combine it with a moving average or a trendline to identify the trend direction and trade breakouts in that direction — a valid upside breakout should be accompanied by a rising VAP, while a valid downside breakout should be accompanied by a falling VAP.

What market conditions affect Volume Accumulation Percentage (VAP) readings?

Choppy market conditions affect Volume Accumulation Percentage (VAP) readings. In such markets, the consecutive price bars close erratically — around the high in one bar and around the low in the next bar.

As such, the indicator will crisscross the zero line, giving a positive reading in one period and a negative reading in the next. Without any direction, the indicator’s readings will be confusing.

Can Volume Accumulation Percentage (VAP) predict price trends?

Yes, the Volume Accumulation Percentage (VAP) can predict price trends but only in the short term. When the indicator is above the zero line and rising, it means that the short-term trend is to the upside.

On the other hand, when the indicator is below the zero line and falling, it suggests that the short-term trend is to the downside. Also, a bullish divergence predicts a potential reversal to an uptrend, while a bearish divergence suggests a potential reversal to a downtrend.

What is the difference between VAP and volume-based indicators?

The difference between VAP and other volume-based indicators is that the VAP checks whether the market is accumulating or distributing by assigning volume as bullish or bearish based on the location of the closing price relative to the current period’s range, while other volume indicators, such as the On-balance volume, simply add or subtract volume from the previous value based on whether the price closed bullishly or bearishly.

In this regard, the VAP is closely related to the accumulation/distribution line and the Chaikin Money Flow. It differs from the Twiggs Money Flow in that the latter compares the close price relative to the true range.

Is Volume Accumulation Percentage (VAP) suitable for short-term trading?

Yes, the Volume Accumulation Percentage (VAP) is suitable for short-term trading if used with a profitable strategy and traded on the right timeframe. Depending on your style, short-term trading could be swing trading, day trading, or scalping.

For swing trading, the indicator can work if used on the daily to 4-hour timeframes. Day trading and scalping requires trading on intraday timeframes, such as the hourly, 30-minute, 15-minute, 5-minute, and 1-minute timeframes.

How can I apply Volume Accumulation Percentage (VAP) to long-term investing?

To apply the Volume Accumulation Percentage (VAP) to long-term investing, you have to use it on long-term timeframes, such as the weekly and monthly timeframes. You may also have to combine your technical analysis with fundamental analysis to find the long-term market narratives you can exploit. In this case, the VAP only helps to time your entry.

What is the best time frame for using Volume Accumulation Percentage (VAP)?

The best time frame for using Volume Accumulation Percentage (VAP) will depend on your trading style, trading strategy, and backtesting results. If you are a day trader, you may want to trade on the 1-hour, 30-minute, or 15-minute timeframe, as they offer the best view of the intraday market movements.

A swing trader, on the other hand, may focus on the 4-hour or daily timeframe to have a broader, multi-day view of the market. You must backtest on various timeframes to find the best for our strategy.

Can Volume Accumulation Percentage (VAP) be used in different asset classes?

Yes, the Volume Accumulation Percentage (VAP) can be used in different asset classes as long as the asset class has reliable volume data. The indicator uses volume in its calculation, so it works only in markets with reliable volume data.

It will not work in the spot forex market since the market is traded over the counter and the total volume data is nearly impossible to get.

How does Volume Accumulation Percentage (VAP) compare to other volume indicators?

Compared to other volume indicators, the Volume Accumulation Percentage (VAP) is similar to the accumulation/distribution line and the Chaikin Money Flow in that it uses the location of the closing price relative to the current period’s range to get price-adjusted volume data.

This is unlike other volume indicators, such as the Twiggs Money Flow, which compares the close price location to the true range. It is also different from the On-balance volume, which simply adds or subtracts volume from the previous value based on whether the price closed bullishly or bearishly.

What are the strengths of the Volume Accumulation Percentage (VAP) indicator?

The strengths of the Volume Accumulation Percentage (VAP) indicator include:

• It helps you to assess the level of buying or selling pressure in the market.
• It can help to confirm whether a trend is still healthy.
• It may help to anticipate market reversals via its divergence signals.

What are the weaknesses of the Volume Accumulation Percentage (VAP) indicator?

The weaknesses of the Volume Accumulation Percentage (VAP) indicator include:

• It cannot be useful in markets with no reliable volume data, such as the spot forex market.
• It considers the location of the closing price relative to the high-low range for the current trading session (price bar).
• Since it does not factor in price changes from one session period to the next session, it will have anomalies when the price gaps up or down.
• Its divergence signals may provide poor market timing when the trend is very strong.

Does Volume Accumulation Percentage (VAP) work well with other technical indicators?

Yes, the Volume Accumulation Percentage (VAP) can work well with other technical indicators if they are used to create a robust trading strategy with clear entry and exit points. For instance, the VAP can be combined with a moving average indicator.

In this case, the moving average can be used to identify the direction of the trend and the VAP may be used to spot an entry after a pullback or a price consolidation.

Can Volume Accumulation Percentage (VAP) help identify support and resistance levels?

No, the Volume Accumulation Percentage (VAP) cannot directly help identify support and resistance levels. However, it can help interpret the price action around a support or resistance level. If the price is consolidating around a resistance level and the VAP is rising, a breakout is likely to happen.

Similarly, if the price is consolidating around a support level and the VAP is falling, a downward breakout is likely to happen.

What software or platforms offer the Volume Accumulation Percentage (VAP) indicator?

The software or platforms that offer the Volume Accumulation Percentage (VAP) indicator are many. Almost all trading and charting platforms, including but not limited to TradinView, MultiCharts, ThinkorSwim, and Prorealcode, offer the VAP indicator.

Moreover, a good programmer can make a custom version for any platform that does not offer it.

What are common mistakes when using Volume Accumulation Percentage (VAP)?

Some of the common mistakes when using Volume Accumulation Percentage (VAP) include:

• Not having a reliable strategy with clear entry and exit criteria
• Using the VAP as a standalone strategy, which is prone to many false signals
• Not backtesting your strategy to be sure it offers a positive profit expectancy before deploying it
• Not combining it with price action analysis to know when the market is consolidating and when it is trending and interpret the readings accordingly
• Not having a risk management plan

How can Volume Accumulation Percentage (VAP) improve trading performance?

The Volume Accumulation Percentage (VAP) can improve trading performance by showing when there is buying pressure (accumulation) and when there is selling pressure (distribution) in the market. If the market is in a consolidation, such as a rectangle, triangle, or wedge chart pattern, and the VAP is rising, there is accumulation — expect a bullish breakout. On the other hand, if the VAP is falling in this situation, there is distribution — expect a bearish breakout.

Is Volume Accumulation Percentage (VAP) better for stocks or forex trading?

The Volume Accumulation Percentage (VAP) is better for stocks trading, rather than forex trading, because the indicator uses volume in its calculation. Stocks are traded on centralized exchanges, such as the New York Stock Exchange, which keeps a good record of the volume data.

There is no centralized exchange for spot forex trading, as the market functions over the counter, and as a result, there is no universal record of the trading volume.

Can Volume Accumulation Percentage (VAP) be used with automated trading systems?

Yes, the Volume Accumulation Percentage (VAP) can be used with automated trading systems if converted into robust trading algorithms that can analyze the markets and execute trades.

This will require creating trading strategies with clear entry and exit rules and then writing the codes for the trading algos.

What is the history and origin of the Volume Accumulation Percentage (VAP) indicator?

The history and origin of the Volume Accumulation Percentage (VAP) indicator can be traced to the 1980s when Marc Chaikin, a renowned stock market analyst and founder of Chaikin Analytics, first developed the Chaikin Money Flow. The Chaikin Money Flow is the ratio of the sum of price-adjusted volumes over a given period to the sum of the volumes over the same period.

However, in 2015, a programmer named LazyBear on the TradingView forum, using the same CMF formula, multiplied the ratio by 100 to express the value in percentage and called it the Volume Accumulation Percentage (VAP) indicator. The two indicators have different default settings for the lookback period but if you set them at the same period, they are the same, with the CMF in fractional values and the VAP in percentage values.