Description:
The Volume Weighted Moving Average (VWMA) is a technical analysis indicator that calculates the average price of a security over a specified period, with each data point weighted by its corresponding trading volume. Unlike traditional moving averages, VWMA gives greater importance to periods with higher trading activity. To compute VWMA, the closing price of the security is multiplied by its trading volume for each period, and these values are then summed over the desired number of periods. The total sum of price-volume products is divided by the total volume over the same period, yielding the VWMA for each period. Traders utilize VWMA to identify trends, support, and resistance levels, as well as potential buy or sell signals, by comparing the VWMA line with the price of the security.
Input Parameters:
- Length: number of periods used in the calculation.
- Offset: The offset value is used to access the data of any candle or indicator with reference to the current candle, to access the current candle data it will use the offset value of "0", to access previous candle data "-1" offset value will be used, access data of previous to previous "-2" will be used.
- Price Source: The specific data points (such as open, high, low, or close) from each candle in a financial chart that an indicator uses for mathematical computations, enabling the calculation of metrics like the average over a specified period.
Use Case:
- Trend Identification: Traders use VWMA to identify the direction of the prevailing trend. When the VWMA is sloping upwards and the price is above it, it indicates a bullish trend, suggesting that buyers are active, especially if the VWMA is rising on increasing volume. Conversely, when the VWMA is sloping downwards and the price is below it, it suggests a bearish trend, indicating that sellers are dominant, particularly if the VWMA is declining on higher volume.
- Confirmation of Breakouts: Traders often use VWMA to confirm breakout signals. For instance, when a security's price breaks above a resistance level accompanied by a surge in trading volume, traders look for confirmation from VWMA. If the VWMA is also trending upwards or crosses above the price during the breakout, it reinforces the validity of the breakout and suggests stronger bullish momentum. Conversely, for breakdowns below support levels, a downward trending VWMA or a cross below the price can confirm the strength of the bearish move.
- Volume Analysis: VWMA is valuable for analyzing volume alongside price movements. Comparing changes in VWMA to changes in price can reveal discrepancies that may signal a potential reversal or continuation of a trend. For example, if the price of a security is rising while the VWMA is falling, it may indicate that the price increase is not supported by strong volume, possibly signaling a weakening of the bullish trend. Conversely, if the price is falling while the VWMA is rising, it may suggest that the decline is accompanied by increasing selling pressure, strengthening the bearish case. Traders use such insights to make informed decisions about entering or exiting positions
This feature can be used in:
- Market Scanner
- Strategy Tester
- Dynamic Alerts
- Multi-Factor Alerts
- Smart Checklist
Do you want to learn more? Check out our Learning Center Article.