Volume Weighted Moving Average (VWMA)

Name Type Prerequisite Use Cases
Volume-Weighted MA (VWMA) Trend/Volume Price & Volume Confirms price trends with high-volume conviction.

Definition

The Volume Weighted Moving Average (VWMA) averages price data with an emphasis on volume. Unlike a Simple Moving Average (SMA), which treats each day's closing price equally, the VWMA gives more weight to days with higher volume.

Mathematical Equation

\[ VWMA = \frac{\sum (\text{Price} \times \text{Volume})}{\sum \text{Volume}} \]

Calculated over a rolling window of \(N\) periods.

Special cases

  • Maximum possible value: Unbounded
  • Minimum possible value: 0
  • Behavior: Follows the price, giving more weight to periods with higher trading volume.

Visualization

Volume Weighted Moving Average

Trading Significance

  1. Trend Confirmation: When VWMA is above the SMA, it implies that higher volume is accompanying rising prices (validating the uptrend).

  2. Divergence: If prices are rising but the VWMA is falling or flat, it suggests the move is not supported by strong volume.

  3. Support/Resistance: Like other MAs, it acts as dynamic support and resistance.