Why Volume Adjusted Moving Average (VAMA) is critical when trading?

 

 

When you trade the stock, should the daily stock price be weighted the same?  Which other factor should be analyzed beside stock price?

 

The answer is trading volume

 

What is Volume Adjusted Moving Average (VAMA)?

When you buy or sell stock, if stock price is the only factor to consider, which means you assume that all price are equally weight, if you view moving average or EMA, you assume that time-based moving averages make the assumption that all trading days are equal.

 

However, important trading days are usually associated with heavier volume. VAMA makes price and volume equal partners when computing the average. Higher volume trading days are more heavily weighted than lower volume days.

With time-based moving averages the period determines how many bars are used to calculate the average. With VAMA the prices are averaged within a specified period of Volume Increments and therefore the look back period will vary depending on how heavy/low the volume was on preceding bars. Because of this, new data being added to the chart can cause the moving average to change through all past data.

 

If you only consider about stock price when buying or selling stock, you could be whipsawed sometime due to low trading volume or high trading volume.

 

To make VAMA more practical, Richard W. Arms Jr., the developer of this indicator, suggests using a Volume Increment of 55 to determine if the stock is strong or weak, Strong stocks tend to stay above this average and weak stocks below.

 

Example of VAMA application : Twitter stock price, trading volume and VAMA

Below is Twitter stock price movement before and after Elon Musk purchasement 

 

It is obviouse that Twitter stock soared on April 4th after Elon Musk mentioned that he purchased 9 percent of Twitter stock, the volume, especailly green color, representing buying volume, jumped dramatically, which pushed Twitter stock from $39 to $49 after stock market opened on April 4th.  Since volume is so high, especially trading volume swing towards one direction, buying, which definitely pushed stock price up gap, since demand to Twitter stock is way high.