The Volume Weighted Moving Average (VWMA) uses volume and price data to plot an average. Unlike Simple Moving Averages, the VWMA will respond more quickly to price moves that are accompanied by higher trade volume.
Traders will sometimes use the VWMA to confirm the strength of a trend, the validity of breakouts, and to add an additional dimension to their moving average analyses.
How to plot a VWMA on the BTSE Platform
Step 1: Load up a chart on the BTSE Platform
Step 2: Click on the “Indicators” tab or push the “/” key
Step 3: Select “VWMA” from the drop-down menu
Step 4: Admire your freshly plotted VWMA
How to trade using the VWMA
There are many ways to trade using the VWMA, with most methods involving its use in combination with other technical indicators.
An example of a simple strategy may be to combine the VWMA with a Simple Moving Average of the same duration (20 days in this case):
This achieves a chart with one VWMA and an SMA of the same duration:
This combination of moving averages is sometimes used by traders to determine the strength of the current trend:
When the VWMA is above the SMA, the trend can be read as bullish
When the VWMA is below the SMA, the trend can be read as bearish
Traders might also use the distance between the VWMA and the SMA as a signal of an impending reversal:
If the price is above the VWMA and the distance between the VWMA and the SMA is narrowing, traders might pre-empt a short-term bearish reversal.
If the price is below the VWMA and the distance between the VWMA and the SMA is narrowing, traders might pre-empt a short-term bullish reversal.
Note: the above strategy is by no means profitable and is simply illustrates how the VWMA is commonly used by some traders.
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