I recently came across a new tool, the Volume Weighted Moving Average. It’s not really a new tool, just a new to me tool, and I must say I am quite surprised I never heard of it before. It uses a combination of two of the most fundamental aspects of technical analysis, volume and moving averages, to create a highly useful indicator for binary options traders.
What Is Volume Weighted Average Price
Volume weighted average price is an indicator originally used by large scale institutional investors, hedge funds and pension funds to determine if entry points were “good” or “bad”. The original indicator was used only on an intraday basis due to the nature of its composition, that is, it used all available data. This meant that the first tick of the indicator was based on one bar or candle while the last tick of the indicator could be based on hundreds or even thousands of candles. Needless to say this makes for a very unusual indicator. Since then a handy feature has been added to the calculation, a time period. With this addition the Volume Weighted Average Price becomes a moving average and much more useful for small time traders ranging from intraday scalpers all the way through long term traders like myself.
The indicator is calculated by multiplying the total number of shares traded in a period by the typical price for that period, divided by the volume for that period. Period could be equal to daily, weekly, hourly, one minute or any other chartable time frame which is good for us because it makes this a multiple time frame indicator, it can be used in any time frame. When compared to simple and exponential moving averages with the same time parameters, 30 bars in the case of my examples, you can see that it tracks price more closely than the simple and less closely than the exponential providing interesting opportunities for traders. As in individual indicator it can be used exactly the same as any other moving average to determine underlying trends and to identify entry points for trades.
Why This Indicator Might Suck
This indicator might suck because it is a lagging indicator. It is based on past price performance so is subject to what has already happened, rather than what may happen in the future. This is not in and of itself a reason to avoid the indicator, merely something that needs to be known when applying it to your analysis. It also might suck because it is based on volume so volume data must be available in order to use it. This means that it may not work with some indices and other assets. The good news is that it will work with ANY type of volume data including ticks, pips or actual share volume.
Why This Indicator Does Not Suck
This indicator does not suck. First of all it performs equally to any number of types of moving averages including the simple and exponential as I mentioned above. It has its own unique calculation so offers a unique insight into average price analysis. It also doesn’t suck because it is based on volume. Volume is one of the most important factors in price movement; when a lot of people are buying or selling the movements tend to be more pronounced with higher rates of success, regardless of the type of indicator you are using.
My Last Thoughts On The Volume Weighted Average Price
I like this indicator. I am going to be using it more and more in my analysis. I like the way it makes crossovers with the exponential moving average and may become a new Geek approved strategy. My caution is that 1) you need to make sure the one you are using is a Moving Volume Weighted Average Price and 2) that your intended asset does indeed include volume data. The original non-moving VWAP is still a decent indicator but not one I would suggest for day traders, or long term traders, because the signals become muted the later in the day or the longer the chart you use. There are a number of sources for this indicator, including MT4, so it shouldn’t be too hard to find the one you like. The one I use is provided by Java Charts accessible through BOTS approved broker Binary.com.