Volume Adjusted Moving Average

Volume Adjusted Moving Average (VAMA) is a technical indicator that combines price and volume when computing the average.

With VAMA prices are averaged within a specified period of Volume Increments and therefore the lookback period will vary depending on how high/ low the volume was on preceding bars. Because of this, new data being added to the chart can cause the moving average to change throughout the preceding period.

The general theory behind VAMA suggests using a Volume Increment of 55 to determine if the market is strong or weak. Strong markets tend to stay above this average and weak ones below, and this is thus the level to consider when consulting VAMA data.

To reduce the number of short term price/ VAMA crossovers (whipsaws) a smaller Volume Increment VAMA can be plotted and used in conjunction with the larger Volume Increment. Potential trading opportunities would occur when the averages cross each other. Here the crossover logic is the same as with simple moving average (SMA). Buy signals are generated when spot price crosses above the VAMA line or when the lower-frequency VAMA line crosses above the higher-frequency VAMA line. On the other hand, sell signals are generated when spot price crosses below the VAMA line or when the lower-frequency VAMA line crosses below the higher-frequency VAMA line.

Calculation

VAMA (Volume Adjusted Moving Average) is calculated by taking the sum of the product of volume and closing prices for each of the last n periods and dividing it by the sum of the trading volume for the same periods. Used the following formula:

VAMA = (Sum of (Volume * Close Price) for n periods) / (Sum of Volume for n periods)

Where:

• Sum of (Volume * Close Price): This is the sum of the product of trading volume and closing prices for each period in the specified range (n periods).
• Sum of Volume: This is the sum of the trading volume for each period in the specified range (n periods).

The VAMA formula provides a moving average that is adjusted based on trading volume, giving more weight to periods with higher volume.