This indicator emphasizes volume by weighing prices based on the amount of trading activity in a given period of time, where prices with heavy trading activity get more weight than prices with light trading activity.
The VWMA has several advantages over a ‘simple’ WMA (which calculates an average of the closing price of ‘n’ number candlesticks giving the same weight to each one). With the volume weighted moving average (VWMA), the closing price of the day with the greatest volume gets a higher weight.
On the IG charts you can turn on the VWMA on by right clicking on the chart itself and selecting ‘Volume Weighted Moving Average’ from the Indicator menu. Many traders use the VWMA and the simple WMA simultaneously.
What does the VWMA tell us?
As the VWMA is based around the volume, the gap between a ‘simple’ weighted moving average and a volume-weighted moving average shows the effect of volume weighting. This can be used to help with confirming trends or pointing out those trends that are weakening.
- If the VWMA stays below the WMA in a bullish market, it can be an indicator that the upward trend is lacking volume support and can signal a reversal in price.
- If the VWMA stays below the WMA in a bearish market, it can confirm a downward trend, signalling that a decline in price may continue.
- The green arrow indicates an area where the VWMA line has crossed from under the WMA, indicating that there could be a bullish trend coming in to play. When the price action is in an upward trend and it’s able to break through both averages then a bullish trend is thought to be confirmed.
- The red arrow indicates an area where the VWMA line crosses below the WMA line, indicating that a bearish trend could be forming. When the price in a downward trend and is able to break through both the averages then a bearish trend is thought to be confirmed.
It’s important to keep in mind that when the VWMA is between the WMA and the price, there is a likelihood of the trend continuing in that direction. If the VMA line crosses over and positions itself between the VWMA and the price, it may be indicating a reversal is in place.
These are only a few examples of how this indicator can be used. Feel free to leave your opinion and share your uses and examples for further discussion.