Weighted Moving Average-Trade with the Volume Weighted Moving Average

4 Simple Ways to Trade with the Volume Weighted Moving Average (VWMA)
By Alton Hill


As stated in its name, the volume weighted moving average (VWMA) is similar to the simple moving average; however, the VWMA places more emphasis on the volume recorded for each period. A period is defined as the time interval preferred by the respective trader (i.e, 5, 15, 30).

Therefore, if you place a 20-period simple moving average (SMA) on your chart and at the same time, a 20-period volume weighted moving average, you will see that they pretty much follow the same trajectory. However, on further review, you will notice the averages do not mirror each other exactly.

The reason for this discrepancy, as we previously stated is the VWMA emphasizes volume, while the SMA only factors the average of the closing price per period.


VWMA versus SMA

The above chart is of Microsoft from September 25, 2015. On the chart, we have placed a 20-period simple moving average (red) and a 20-period volume weighted moving average (blue). At the bottom of the chart, you will also see the volume indicator, which we will use in order to demonstrate how the VWMA responds to volume. In the green circles on the chart and on the volume indicator, we have highlighted the periods of high volume. Notice, that wherever we have a big volume candlestick, the blue volume weighted moving average starts moving away from the trajectory of the red simple moving average. Then, whenever we have lower market volumes, the red simple moving average and the blue volume weighted moving average are very close in value.

Can you see the difference now?
What is the Volume Weighted Moving Average good for and what signals can we get out of it?

The VWMA has the ability to help discover emerging trends, identify existing ones and signal the end of a move.

#1 – Discovering Emerging Trends

If the volume weighted moving average switches below the simple moving average, this implies a bearish move is on the horizon. This could lead to a weakening in the bullish trend or an outright reversal. If the price is able to break through both the VWMA and the SMA a bearish trend is confirmed and a short position can be initiated.

Conversely, if the volume weighted moving average moves above the simple moving average, a bullish trend change is likely around the corner. Once the price is able to break both the VWMA and the SMA to the upside, one can open a long position.

The below chart illustrates these trade setups.


Breakout through VWMA and SMA

This is a M2 chart of Deutsche Bank from August 5, 2015. On the chart, I am using the 30 SMA and 30 VWMA. As you see, after the market was range bound for a period of time, we notice an increase in the distance between the volume weighted moving average and the simple moving average. At the same time, the price breaks out of the range, which gives us an additional bullish signal. We go long with the second bullish candle after the breakout of the range and we enjoy the impulsive move higher.

#2 – Identifying Current Tends

Here we have a simple rule, if our volume weighted moving average is between the chart and the simple moving average, then we have a signal for a trending market. Note that sometimes the volume weighted moving average will test the simple moving average as a support and resistance, depending on the primary direction of the security. These tests can be considered as an implication of a potential trend reversal. Take a look below:


Trend Folllowing and VWMA

This is a M5 chart of Google from July 22nd, 23rd and 24th from 2015. We use the same 30 SMA and 30 VWMA as in the previous chart example.

In the green circle, you will see the moment where the price breaks the 30 SMA and the 30 VWMA in a bearish direction. At the same time, the blue VWMA further separates from the SMA and is between the SMA and the candlesticks. This is a clear “short it” signal. If you check a half an hour later, you will see that the blue VWMA is still below the red SMA, which means that the bearish trend is still intact.

The arrows show the moments, where the VWMA provided a signal for the continuation of the bearish trend. If we were to go short at any of these points, we would not be disappointed. The last red arrow shows us the moment when the bearish trend shows signs of slowing down as the VWMA and SMA begin to hug one another.

#3 – Detecting the End of a Trend

This signal is pretty much the same as when we had to discover emerging trends. The difference is we are looking for a contrary signal to the primary trend. For example, you have taken a long position and you notice a tightening in the distance between the VWMA and the SMA. This is the moment where you might want to consider the option to get out of the market and to collect your profits.


Trend Reversal and VWMA

The above chart is of Facebook from July 16th – 22nd. Facebook begins the week with a strong gap up with high volume. After the gap, we have a solid bullish candle and a large distance between the 30-period VWMA and the 30-period SMA. Therefore, we go long with the closing of the first bullish candle. Facebook keeps increasing until the volume drops and the market enters a correction phase. This is when the blue VWMA interacts with the red SMA and we get a “caution” signal. Fortunately, with the next candle, the trading volume increases and the VWMA moves again above the SMA.

Still in the game! Bullish we are!

We hold our position for about 20 more periods and we nearly double in our long position. Then, the blue VWMA switches below the red SMA (red circle) and refuses to go above for about 8-9 periods. We believe 3-4 periods of waiting are enough in order to realize that this is the right moment to close our position. After we exit our position, the price of Facebook starts to rollover and eventually breaks down through the moving averages. Exiting Facebook at the right time brought us a profit of about 55 bullish pips! Viva les Market Volumes!

#4 – The VWMA Divergence

Yes, that is correct! You can discover divergences between the volume weighted moving average and the general chart. You will say, “How could this be possible? This is not an Oscillator!”

Nevertheless, the volume weighted moving average could be in a divergence with the chart, and the secret is in the second moving average we advised you to use. When you have for example a simple moving average in addition to the chart, the volume weighted moving average will switch above and below your simple moving average depending on trade volume. Therefore, whenever the volume weighted moving average is closer to the chart than the simple moving average, we can say that the market is trending and volumes are increasing! Still not getting “the divergence”, let’s walk through a chart example.


Divergence and VWMA
Above is an M15 chart of Microsoft from the first seven days of October, 2015. As you see, after a strong bullish movement, the blue volume weighted moving average moves below the red simple moving average. Therefore, we expect to see a decrease on the chart. Although the bullish movement loses its intensity, the price of Microsoft still manages to close higher for a few candlesticks. This all happens while the blue volume weighted moving average stays beneath the red simple moving average, thanks to the bigger trading volumes shown on the bottom of the chart. This is a bearish divergence, which you could use as an opportunity to go short.


Divergence and VWMA – 2

KABOOM! The result is 100 bearish pips and a successfully traded bearish divergence between the chart and your 20-period volume weighted moving average. Note, the high bearish volumes at the bottom, which appeared right after the divergence and right before the drop of the price. These bearish volumes also confirm the authenticity of our bearish divergence.

In Summary

In conclusion, we could say that although the volume weighted moving average looks complicated at times, it is not!

1. If you have difficulties understanding the VWMA, just open a volume indicator at the bottom of your chart. It will give you a better picture explaining the “chaotic” movement of the VWMA in comparison to the SMA.
2. The volume weighted moving average places a greater emphasis on periods with higher market volume.
3. The volume weighted moving average is a better indicator when combined with another trading instrument for trading signals.
4. The simple moving average is a great tool to combine the volume weighted moving average.
5. VWMA can provide the following signals
6. A trend is coming!
7. A trend it is!
8. The trend is ending!
9. The VWMA can also identify divergence in the market

- See more at: http://tradingsim.com/blog/volume-weighted-moving-average/?awt_l=KPRhQ&awt_m=3ivNTbcsUa0_bZ_#sthash.Cssb198B.dpuf

High Frequency Trading: SEBI says fact-finding exercise already underway

Action on High Frequency Trading: SEBI says fact-finding exercise already underway

MONEYLIFE DIGITAL TEAM | 26/10/2015 06:29 PM 



In a reply to a set of 51 questions raised by Moneylife on 12th September on high frequency trading in NSE, SEBI has just informed us that the issue is drawing its serious attention and that a fact-finding exercise is already underway

Market regulator Securities and Exchange Board of India (SEBI) told Moneylife that its Technical Advisory Committee (TAC) has extensively discussed the issue of high frequency trading (HFT) and the matter is drawing its serious attention. SEBI was replying to a detailed email sent on 12 September 2015 by Sucheta Dalal, Managing Editor of Moneylife. It said, "We would like to thank you for taking efforts to flag the issue. We would like to inform you that a fact-finding exercise is already under way by SEBI. The matter has also been discussed extensively in the Technical Advisory Committee of SEBI and is drawing its serious attention. While we have noted the issues raised in your email, you will appreciate that we would not like to make comments on matters which are under investigation."

The same 51-point questionnaire was also sent to top executives of National Stock Exchange (NSE). However, there has been no response from the stock Exchange. In June this year, Moneylife had written about the allegations by a Whistleblower about NSE’s HFT operations in 2011-14 period . Moneylife had duly contacted NSE for its response before writing the article. On that occasion too, the NSE had refused to respond despite three attempts by Moneylife to elicit its views. After Moneylife published the articles on HFT , NSE filed a Rs100 crore defamation suit against Moneylife with prayers to remove the articles and stop Moneylife from writing further on the issue. A single Judge in Bombay High Court dismissed this. The judge also asked NSE to pay to Ms Dalal, Debashis Basu, Editor & Publisher of Moneylife Rs1.5 lakh each as cost and Rs47 lakh to two trusts, Tata Memorial Hospital and the Masina Hospital for free treatment of the poor. The Exchange has filed an appeal against that order.

Of the 51 questions Moneylife had asked to SEBI and NSE, some the questions were:

• What is the additional information that a co-location user get vis-a-vis other brokers?
• What is the response time that NSE co-location users receive vis-a-vis non-co-location users? 
• How many physical co-location facilities does NSE have? Why is there more than one colocation? 
• What are the advantages a person will enjoy if he or she continued to get faster information vis-a-vis others in NSE co-location?
• What advantages do members in co-location receive vis-a-vis members who are not in co-location?
• What is the value of orders placed by members in last 5 years from NSE co-location? 
• Under which SEBI circular or guidelines did NSE start providing co-location facilities? If these services were started before any guidelines were formulated, did NSE ask for specific SEBI approval for starting such facilities?
• Were some NSE members ever allowed to log in ahead of others systematically?

Here is the reply we received from SEBI...

Subject: Your email to Chairman, SEBI with regard to complaint of a market participant against NSE

This has reference to your email dated September 12, 2015 to Chairman, SEBI wherein you had sought certain details regarding an anonymous complaint of a market participant against NSE.

We would like to thank you for taking efforts to flag the issue. We would like to inform you that a fact finding exercise is already under way by SEBI. The matter has also been discussed extensively in the Technical Advisory Committee of SEBI and is drawing its serious attention. While we have noted the issues raised in your email, you will appreciate that we would not like to make comments on matters which are under investigation. However, we would like to inform on the various measures taken by SEBI, in the recent past.

SEBI has ensured that regulation of the securities market keeps pace with the dynamism displayed by the capital markets. SEBI has taken various proactive measures over the last few years to ensure that appropriate risk management framework is in place to address the risks associated with adoption of such technological advancements.

In line with the above emphasis, SEBI was one of the first securities market regulators globally to put in place a framework for regulation of algorithmic trading. SEBI has also put-in place a regulatory framework to ensure fair and equitable access to the co-location facility and integrity and security of the data and trading systems. The regulatory framework was finalized after taking on-board views of the market participants through a discussion paper floated on May 03, 2013. High Frequency Trading (HFT) recently has drawn the attention of IOSCO too and the member jurisdictions are deliberating the impact of such trading on the market structure and market participants. SEBI is in the process of studying various issues involved and gather international experience to take further regulatory steps to regulate HFT.

In addition, SEBI has also issued circulars on various other technology related areas such as Cyber security and cyber resilience framework for stock exchanges, clearing corporation and depositories, Testing requirements for trading software, Business continuity planning and disaster recovery, Direct Market Access, Internet Based Trading, Safeguards to avoid trading disruption in case of failure of software vendor, etc.

We may like to state that SEBI would take all necessary steps in the interests of investors in securities and market integrity.