Volume Weighted Moving Average: an average that ignores quiet bars

What it measures

A volume weighted moving average multiplies each bar by its volume before averaging, so a heavily traded bar counts for far more than a quiet one.

The line therefore tracks where the volume actually happened rather than where price merely went. A drift on no volume barely moves it.

Comparing it against a simple average of the same period is the real use: the gap between them is a direct measure of whether the recent move was paid for.

How it is calculated

These are the steps Basis performs, verified against the published definition.

1. 1

   For each bar in the window, multiply the source price by that bar volume.

2. 2

   Sum those products across the window.

3. 3

   Sum the volumes across the same window.

4. 4

   Divide the first sum by the second.

Settings

Twenty periods against a twenty-period simple average is the standard pairing, because the comparison only works when both use the same window. Changing one without the other destroys the entire reading.

How to read it

• VWMA above a simple average of the same period means the higher prices came on heavier volume, which is a healthy advance.
• VWMA below the simple average during a rally means the buying is thin and the move is being carried by quiet bars.
• The two lines crossing is a change in who is doing the trading, not a change in direction.
• On its own it behaves like a slightly leading moving average, and the divergence is where the information is.
• On a weekend or an overnight lull the VWMA barely moves while a simple average drifts along with price. That divergence is not a signal in itself, but it is a reliable way to see that the last few bars of a move happened when almost nobody was trading.

Where it misleads

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