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 discuss the Volume-adjusted Moving Average.
Also see: Moving Averages
Introduction
The Volume-adjusted Moving Average (VAMA) is a technical indicator that is used to identify trends in the market while taking into account the volume of trades. It is similar to other moving averages, such as the Simple Moving Average (SMA) and the Exponential Moving Average (EMA), but it gives greater weight to periods with higher trading volume.
The Volume-adjusted Moving Average (VAMA) was invented by Buff Dormeier, a technical analyst and founder of the company Business Logic Systems. The VAMA was first introduced in the early 1990s as a way to improve upon traditional moving averages by incorporating trading volume into the calculation. The VAMA has since become a popular technical indicator among traders and investors who are looking to identify trends in the market while taking into account the impact of trading volume on price action.
The VAMA is calculated by multiplying the price of each period by the volume of trades for that period and then dividing the total by the cumulative volume. This means that periods with higher trading volume have a greater impact on the moving average than periods with lower trading volume.
Traders use the VAMA to identify trend direction, determine support and resistance levels, and generate trading signals. The VAMA can help traders identify trends that may not be visible with other moving averages, as it takes into account the impact of trading volume on price action.
Computing the Volume-adjusted Moving Average
The Volume-adjusted Moving Average (VAMA) is a moving average that incorporates trading volume into its calculation. The formula for calculating the VAMA is as follows:
VAMA = Sum(Close * Volume, n) / Sum(Volume, n)
Where:
Close: the closing price of the security being analyzed
Volume: the trading volume for the period being analyzed
n: the number of periods over which the moving average is being calculated
The VAMA is calculated by summing the product of the closing price and trading volume for the previous n periods and dividing that by the sum of the trading volume for the same n periods.
For example, to calculate the VAMA for a 20-day period, you would sum the product of the closing price and trading volume for the previous 20 days and divide that by the sum of the trading volume for the same 20 days. This calculation is repeated for each day, resulting in a moving average that incorporates both price and volume data.
The VAMA can be calculated using any time frame or chart interval, such as daily, hourly, or even minute-by-minute charts. It is important to adjust the length of the moving average to suit the trader’s preferences and trading style.
ChartAlert ships with the Volume-adjusted Moving Average.
How to use the Volume-adjusted Moving Average in trading
Here are a few ways the Volume-adjusted Moving Average (VAMA) can be used in trading:
Identifying Trend Direction
The VAMA can be used to identify trend direction by looking at the slope of the moving average. If the VAMA is sloping upwards, it indicates an uptrend, and if it’s sloping downwards, it indicates a downtrend. This can help me identify potential buy or sell signals.
Confirming Support and Resistance Levels
The VAMA can also be used to confirm support and resistance levels. If the price is above the VAMA and the VAMA is sloping upwards, it indicates that the market is in an uptrend and the support level may be confirmed. Similarly, if the price is below the VAMA and the VAMA is sloping downwards, it indicates that the market is in a downtrend and the resistance level may be confirmed.
Generating Buy and Sell Signals
The VAMA can be used to generate buy and sell signals when it crosses the price. For example, if the price is above the VAMA and the VAMA crosses above the price, it may be a buy signal. Conversely, if the price is below the VAMA and the VAMA crosses below the price, it may be a sell signal.
Combining with Other Indicators
The VAMA can be used in combination with other indicators, such as the Relative Strength Index (RSI) or the Moving Average Convergence Divergence (MACD), to confirm potential buy or sell signals.
Overall, the VAMA is a versatile technical indicator that can be used in multiple ways to identify trends, confirm support and resistance levels, generate buy and sell signals, and combine with other indicators. However, it’s important to note that the VAMA, like any other technical indicator, should be used in combination with proper risk management and other analysis methods to make informed trading decisions.
Buff Dormeier on the Volume-adjusted Moving Average
Buff Dormeier, the inventor of the Volume-adjusted Moving Average (VAMA), intended it to be used as a trend-following indicator that incorporates trading volume into its calculation. The VAMA is designed to smooth out price movements and provide a clearer picture of the overall trend direction of the market.
Dormeier believed that trading volume plays a critical role in market movement and that incorporating it into the calculation of the moving average could provide more accurate trend analysis. He developed the VAMA by first calculating a simple moving average (SMA) of price and then dividing it by the average trading volume over a specified period. This process produces a volume-adjusted moving average that gives more weight to price movements that occur on higher-than-average trading volume days.
The VAMA is intended to be used in the same way as other moving averages, such as the Simple Moving Average (SMA) or Exponential Moving Average (EMA), to identify trends and potential trade opportunities. The key difference is that the VAMA is more responsive to changes in trading volume, which can provide traders with additional insights into market conditions.
Dormeier also suggested that the VAMA can be used in conjunction with other technical indicators and trading strategies to further enhance its effectiveness. For example, traders can combine the VAMA with other momentum indicators like the Relative Strength Index (RSI) or the Moving Average Convergence Divergence (MACD) to confirm potential trade signals.
Overall, Buff Dormeier intended the Volume-adjusted Moving Average to be used as a tool to help traders better identify and follow trends in the market by incorporating trading volume into the calculation of the moving average.
Advantages & Limitations of using the Volume-adjusted Moving Average
Here are some advantages and limitations of using the Volume-adjusted Moving Average:
Advantages
- Better identification of trends: The VAMA takes into account the volume of trades, which can help traders identify trends that may not be visible with other moving averages.
- Reduces false signals: By giving greater weight to periods with higher trading volume, the VAMA can help reduce false signals that may occur with other moving averages.
- Customizable: The VAMA can be customized to different time frames, making it a versatile tool for traders who use multiple time frame analysis.
- Easy to use: The VAMA is easy to calculate and can be used by traders of all experience levels.
Limitations
- Lagging Indicator: The VAMA, like other moving averages, is a lagging indicator and may not provide timely signals in fast-moving markets.
- Risk Management: The VAMA does not provide information about market volatility or risk management, which are important considerations for traders.
- Limited to Markets with Volume Data: The VAMA can only be used in markets where volume data is available.
- False Signals: Although the VAMA can reduce false signals, it is still possible to receive false signals, and traders should always use it in combination with other indicators and analysis methods.
In conclusion, the Volume-adjusted Moving Average is a useful technical indicator that can help traders identify trends while taking into account the impact of trading volume on price action. However, like any technical indicator, it has limitations and should be used in combination with other analysis methods and proper risk management.
The Volume-adjusted Moving Average (VAMA) is a technical indicator that incorporates trading volume into the calculation of the moving average, providing traders with additional insights into market conditions. By weighting price movements on higher-than-average trading volume days more heavily, the VAMA can help identify potential trend reversals or changes in market direction. The VAMA can also be customized to different timeframes and trading styles, making it a versatile tool for traders.
It’s important to remember that the VAMA, like any technical indicator, is not a foolproof solution and can produce false signals. Traders should use the VAMA in conjunction with other technical indicators and analysis methods to confirm potential trade signals. Furthermore, past performance is not indicative of future results and trading carries risk. Traders should conduct their own research and analysis before making any trading decisions and should consider their own risk tolerance, financial goals, and market conditions before incorporating the VAMA into their trading approach.
