3 mins read
The Volume Weighted Moving Average (VWMA) is a technical analysis indicator used by traders to determine the average price of an asset over a given period of time, taking into account both price and volume. The VWMA is a variation of the Simple Moving Average (SMA) that gives greater weight to periods of higher volume, making it a valuable tool for traders to determine the true average price of an asset over a given period of time. In this article, we will discuss the definition of the VWMA, its importance in trading, and how it can be used to improve trading strategies.
Volume Weighted Moving Average (VWMA) Calculation
The Volume Weighted Moving Average (VWMA) is calculated by taking the sum of the product of volume and price over a period of time and dividing it by the total volume for that period. The formula used to calculate the VWMA is similar to the formula used to calculate the SMA, except that the VWMA is weighted by volume. In simple terms, the VWMA takes into account both the price and volume of an asset over a given period of time and calculates the average price weighted by the volume of trades. The resulting value represents the average price paid by all market participants during that period, providing a more accurate representation of the true market value.
Interpreting the Volume Weighted Moving Average (VWMA)
Interpreting the Volume Weighted Moving Average (VWMA) is a critical aspect of trading. One of the primary uses of the VWMA is to determine the fair value of an asset. Traders can compare the current price of an asset to its VWMA to determine if it’s overvalued or undervalued. If the price is above the VWMA, the asset may be overvalued, while if the price is below the VWMA, the asset may be undervalued. The VWMA can also be used to determine the strength of a trend. An upward-sloping VWMA indicates a strong uptrend, while a downward-sloping VWMA indicates a strong downtrend. Finally, the VWMA can help traders identify potential support and resistance levels. When the price of an asset approaches the VWMA, it can act as a support or resistance level, and traders can use this information to make informed trading decisions.
Volume Weighted Moving Average (VWMA) Trading Strategies
One of the most popular trading strategies used by technical traders is known as the Volume Weighted Moving Average (VWMA). The idea behind VWMA is to take into account the levels of volume when analyzing a chart rather than just price points. By doing this, traders can gain additional insight into market trends and support and resistance levels in order to make more accurate trading decisions. VWMA strategies also allow for traders to focus on important price movements, especially during periods of increased trading activity. This helps them to identify opportunities sooner and react quicker with their trades than they would if they just looked at traditional price charts. In addition, VWMA strategies can help traders gauge the strength of potential entries and exits, making them effective tools in improving their overall trading success.
Volume Weighted Moving Average (VWMA) Limitations
VWMA is an effective tool for traders when it comes to plotting price action over time, but there are certain limitations that should be kept in mind. Firstly, VWMA is heavily reliant on recent data points and therefore may miss out on important signals related to the underlying trend of a stock or asset. Additionally, the average is prone to large fluctuations during periods of high volatility, which can make interpreting the information difficult. Lastly, since the average weighs past events more heavily than recent ones, this can lead to inaccurate results when trying to predict future price movements as current events may not be accounted for. By understanding these limitations and adjusting accordingly, traders will still be able to benefit from using VWMA as part of their overall trading strategies.
Example scanners and strategies that use VWMA
The Volume Weighted Moving Average can be used in both Scanning the market and Testing Strategies. To see how exactly it can be used in these ways, we provide the following samples. The scanner searches the market for stocks using this indicator, and the strategy tests buying and selling rules built around this indicator.
Don’t Settle for Ordinary Trading Software
Level the playing field with enterprise-grade trading tools built for everyone. Access over 200 indicators, including pattern recognition, momentum, volatility, and more. Scan, chart, and strategize using any combination of indicators and timeframes.
Try TrendSpider
The Bottom Line
The Volume Weighted Moving Average (VWMA) is an effective tool that traders can use to analyze market trends, identify potential support and resistance levels, and gauge the strength of potential entries and exits. By taking into account both price and volume data, VWMA provides a more accurate representation of true market value than traditional price charts alone. However, there are certain limitations to VWMA that traders should be aware of and adjust for in order to maximize their trading success. By understanding these limitations and using the tool correctly, traders can gain an additional edge when making informed trading decisions.
Preview some of TrendSpider’s Data and Analytics on select Stocks and ETFs
Free Stock Chart for MRO$28.35 USD+0.48 (+1.72%)Free Stock Chart for XOM$113.12 USD+0.37 (+0.33%)Free Stock Chart for MSFT$426.96 USD+3.09 (+0.73%)Free Stock Chart for TSLA$173.50 USD-3.98 (-2.24%)Free Stock Chart for NCLH$17.66 USD-0.13 (-0.73%)Free Stock Chart for BA$191.15 USD+0.91 (+0.48%)
Related:
Moving Averages
Introduction to Moving Averages
Moving averages are one of the financial industry’s most widely used technical analysis tools. Essentially, a moving average is a calculation used to analyze the average price of an asset over a given period. This calculation is based on a certain number of past prices that are averaged to provide an indication of the direction …
Introduction to Moving AveragesTechnical Indicators
Demystifying Technical Indicators: Understanding the Role of Technical Indicators in Trading
Introduction to Technical Indicators Purpose of Technical Indicators in Trading Technical indicators are essential tools for traders to help them better understand price movements, trends, and potential trading opportunities. They are mathematical calculations based on historical price data, volume, and/or other factors that are used to forecast future price movements. The Development of Technical Indicators …
Demystifying Technical Indicators: Understanding the Role of Technical Indicators in Trading
What is the Volume Weighted Average Price (VWAP)?ZLEMA Indicator (Zero Lag Exponential Moving Average)