Variable Moving Average (VMA)

A Variable Moving Average is a technical anaysis indicator for market analysis . . . and it can adapt to changes in volatility and help identify potential trend changes

9 minutes


A moving average is a simple but powerful tool that can help you identify the trend direction, support and resistance levels, and momentum of a security. It is calculated by taking the average price of a security over a specified number of periods, such as days, weeks or months. By doing so, it smooths out the random fluctuations and noise in the price data and reveals the underlying trend.

There are different types of moving averages that can be used for technical analysis, each with its own advantages and disadvantages. In this blog post, we will discuss the Variable Moving Average.

Also see: Moving Averages


Introduction

Variable Moving Average (VMA) is a technical analysis tool used by traders to identify trends and potential trend reversals in financial markets. Unlike traditional moving averages, VMA adjusts its calculation period based on market volatility, making it a dynamic indicator. Tushar Chande, a well-known technical analyst and author of several books on trading and technical analysis, invented VMA to adapt the moving average to changing market conditions. Chande has made significant contributions to the field of technical analysis, developing several other technical indicators, such as the Chande Momentum Oscillator, the Aroon indicator, and the QStick indicator.

VMA calculates the sum of the product of closing prices and the weight of each closing price over a given period. The weight assigned to each closing price depends on the level of volatility in the market. When the market is more volatile, a lower weight is assigned to each closing price, and when the market is less volatile, a higher weight is assigned to each closing price. This helps smooth out price fluctuations and provides a more accurate representation of the trend.

Traders can use VMA in a variety of ways, including identifying trends, determining potential trend reversals, and potential entry and exit points, and confirming the strength of a trend. VMA can also be used in conjunction with other technical indicators to confirm trading signals, making it a useful tool for traders looking to analyze market trends and make informed trading decisions.

In conclusion, the dynamic nature of VMA has made it a popular technical analysis tool among traders who want to analyze market trends and make informed trading decisions.


Computing the Variable Moving Average

The Variable Moving Average (VMA) is a dynamic moving average that adjusts to market conditions and provides a more accurate representation of the trend. To calculate the VMA, a formula is used that takes into account the level of volatility in the market. The formula for the VMA is as follows:

VMA = (Sum of (Closing Price x Weight)) / (Sum of Weight)

Where Closing Price is the price of an asset at the end of a trading session, and Weight is the weight assigned to each closing price based on the level of volatility in the market.

To calculate the weight, the True Range (TR) needs to be determined. TR is the greatest of the following three values: the absolute value of the current high minus the previous close, the absolute value of the current low minus the previous close, or the absolute value of the current high minus the current low.

Once the TR has been calculated for each period, the Average True Range (ATR) is determined over a specified number of periods. The ATR is then used to determine the weight for each closing price using the following formula:

Weight = ATR / Closing Price

The period of the VMA is determined by the user and can vary depending on the asset being analyzed and the trading strategy being employed. A shorter period will be more responsive to price movements, while a longer period will provide a smoother trend line.

In summary, the VMA is a powerful tool that takes into account market volatility to provide a more accurate representation of the trend. Traders can adjust the VMA period to suit their trading strategy, making it a versatile tool in financial markets.

ChartAlert ships with the Variable Moving Average.


How to use the Variable Moving Average in trading?

The Variable Moving Average (VMA) is a dynamic tool that traders can use to analyze market trends and make informed trading decisions. Below are practical tips to effectively use the VMA in trading:

Determine the appropriate period

The period of the VMA should be chosen based on the asset being analyzed and the trading strategy being employed. A shorter period will be more responsive to price movements, while a longer period will provide a smoother trend line.

Use the VMA as a trend-following indicator

The VMA works best as a trend-following indicator. Traders can take a long position when the VMA is trending higher and a short position when the VMA is trending lower. This can help identify potential entry and exit points.

Combine the VMA with other indicators

The VMA can be used in combination with other technical indicators such as Relative Strength Index (RSI) or Moving Average Convergence Divergence (MACD) to confirm trading signals. This can help traders make well-informed trading decisions.

Consider the overall market conditions

The VMA should be used with an analysis of the overall market conditions. Traders should consider market volatility, economic data releases, and geopolitical events when making trading decisions.

Use it for setting stop-loss orders

Stop-loss orders can be used to limit potential losses in case the market moves against a trader’s position. Traders should determine an appropriate stop-loss level based on the level of risk they are willing to take on.

Avoid using the VMA in isolation

The VMA is a useful indicator, but traders should not rely on it exclusively when making trading decisions. Traders should use a variety of technical indicators and fundamental analysis to confirm signals and make well-informed trades.

Regularly review and adjust the VMA period

The period of the VMA should be reviewed and adjusted regularly to ensure it remains appropriate for the asset being analyzed and the trading strategy being employed. Traders should also consider changing the VMA period when market conditions change or when a new trend develops.

In summary, by using the VMA in combination with other technical indicators and considering the overall market conditions, traders can improve their chances of success in the financial markets.


Tushar Chande on Variable Moving Average

The Variable Moving Average (VMA) was created by Tushar Chande to address the limitations of fixed-period moving averages, such as the simple moving average (SMA), during periods of high market volatility. Chande designed the VMA to be a dynamic moving average that adapts to changing market conditions by adjusting the period of the moving average based on the level of volatility.

The VMA is meant to be used as a trend-following indicator, with traders taking a long position when the VMA is trending higher and a short position when it is trending lower. Chande also recommended using the VMA in conjunction with other technical indicators, such as the Relative Strength Index (RSI) or Moving Average Convergence Divergence (MACD), to confirm trading signals.

Overall, Chande believed that the VMA could help traders make more informed trading decisions by providing a more accurate representation of the trend and reducing the number of false signals generated by traditional fixed-period moving averages.


Advantages & Limitations of the Variable Moving Average

The Variable Moving Average (VMA) offers several advantages to traders who are looking to make informed trading decisions in financial markets.

These advantages include:

  • Responsiveness to market conditions: The VMA adjusts its period to reflect changes in market conditions, making it more responsive to price movements during periods of high volatility. This helps traders identify potential entry and exit points more accurately.
  • Reduced lag: By adapting to market conditions, the VMA can help reduce lag and provide a more accurate representation of the current trend. By utilizing the VMA, traders can improve their ability to make informed choices, leading to enhanced trading decisions.
  • Trend identification: The VMA can be a useful tool for identifying trends and potential trend reversals in financial markets. This can help traders determine when to enter or exit a position.
  • Customizable: The VMA can be customized to suit the trading style and preferences of individual traders, making it a versatile tool.

Despite its advantages, the VMA has some limitations that traders should be aware of, including:

  • Complexity: The VMA can be more complex than traditional moving averages, which may require more time and effort to understand and implement effectively.
  • False signals: While the VMA is designed to reduce false signals, it can still produce them in certain market conditions. Traders should be cautious when using the VMA in isolation and use a combination of technical indicators and fundamental analysis to confirm signals.
  • Subjectivity: The determination of the appropriate period for the VMA can be subjective, as it depends on the asset being analyzed and the trading strategy being employed. Traders should carefully consider their own risk tolerance and trading objectives when determining the appropriate VMA period.
  • Data sensitivity: The VMA can be sensitive to the input data used to calculate it, which can affect the accuracy of the indicator. It is important to ensure that the data used to calculate the VMA is accurate and reliable. Traders should also regularly review and adjust the VMA period to ensure it remains appropriate for the asset being analyzed and the trading strategy being employed.

In summary, the VMA can be a valuable tool for traders looking to analyze market trends and make informed trading decisions. However, traders should be aware of its limitations and use it in conjunction with other technical indicators and fundamental analysis to confirm signals and make well-informed trades.


The Variable Moving Average (VMA) is a valuable instrument for traders seeking to analyze market trends and make well-informed trading decisions. Its unique feature of adjusting its period according to market conditions helps to minimize lag and provide a more precise representation of the current trend. Additionally, traders can customize the VMA to suit their individual trading styles and preferences.


Although the Variable Moving Average (VMA) can be a valuable tool, no trading strategy can guarantee success, and past performance does not ensure future outcomes. Therefore, traders should combine the VMA with other technical indicators and fundamental analysis to confirm trading signals and make informed trades. Additionally, it’s vital to periodically review and adjust the VMA period to ensure it’s suitable for the asset being analyzed and the trading strategy used.

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