VWAP vs VWMA: Exploring the differences
VWAP and VWMA and are both volume based indicators. VWMA focuses on periods of high volume, while VWAP incorporates volume when calculating an average price. Both offer crucial information, but traders must consider their needs and strategy when choosing between the two.
What is VWMA?
The calculation of VWMA (Volume weighted moving average) gives more weight to volume, meaning that the price action of an asset with higher trading volume will have a greater impact.
This can help to better reflect sentiment towards an asset, as higher trading volume is often seen as a sign of strong market sentiment. The VWMA can be used to help identify trends and make trading decisions.
What is VWAP?
The Volume weighted average price (VWAP) is a measure of the average price of an asset over a specific period, weighted by volume.
VWAP can be used to analyze the price performance of a specific asset over a certain period of time, where the volume of trades is taken into account to calculate the average price.
This means that periods of high trading volume will have a greater impact on the VWAP calculation than periods of low trading volume.
Calculating VWAP and VWMA
The calculation of VWAP and VWMA are similar but have different inputs. One is calculated using the average price and volume during a trading period (intraday, daily, weekly, etc) and the other using the closing price and volume.
How to calculate VWMA
The VWMA is calculated by taking the sum of the product of the closing price and volume for each period, divided by the sum of the volume for the same period.
- First, multiply the asset's closing price by it's volume: (Closing Price x Volume)
- Next, sum the product of all the periods: Σ(Closing Price x Volume)
- Finally, divide the sum of the product by the sum of the volume for all the periods: Σ(Closing Price x Volume) / Σ(Volume)
How to calculate VWAP
- Calculate the average price: (High Price + Low Price + Close Price) / 3)
- Then the product of the price and volume for each period must be calculated: (Price x Volume)
- Next, the products of all the periods must be summed up: Σ(Price x Volume)
- Finally, you need to divide the sum of the products by the sum of the volume for all the periods: Σ(Price x Volume) / Σ(Volume)
It's important to understand the underlying math when using these indicators in your trading strategies. And test their effectiveness with strategy backtesting tools.
Which is better? VWMA or VWAP?
If your goal is to identify trends, then using a VWMA could be more useful. But if your goal is to compare the performance of an asset to its historical average, or if an asset is over-/under-valued, then VWAP could be more useful.
Both indicators should be used in conjunction with other techniques such as technical, fundamental and market sentiment analysis when building your trading strategy.
Before putting your strategy to work, you should backtest your strategy and have a clear risk management plan in place.
VWAP trading ideas
- Mean Reversion: Can be used to identify potential mean reversion levels by comparing current price to the VWAP.
- Trend Following: Can be used to confirm the direction of a trend by showing if price is above or below the VWAP.
- Momentum Trading: Can be used to gauge the strength of momentum by observing whether price is diverging from or converging with the VWAP.
- Breakout Trading: The VWAP can be used in combination with other technical analysis tools, such as Bollinger Bands, to identify breakouts in the market.
VWMA trading ideas
- Trend identification: The VWMA is often used to identify trends in a market, as it takes into account both price and volatility. When the price is above the VWMA, it is considered an uptrend, and when the price is below the VWMA, it is considered a downtrend.
- Support and resistance: The VWMA can also act as a support or resistance level.
- Crossover signals: Traders may use the VWMA as a trigger to enter or exit a trade. For example, when the price crosses above the VWMA, it may be a signal to buy, and when the price crosses below the VWMA, it may be a signal to sell.
- Volatility filter: The VWMA can also be used as a volatility filter, as it takes into account volatility, which is an important factor in price movements.
Conclusion:
Volume Weighted Moving Average (VWMA) and Volume Weighted Average Price (VWAP) are both technical indicators that factor in trading volume when analyzing the price of an asset. The main difference between them is that VWMA is a moving average based on past data, while VWAP is a real-time indicator based on current data.
No indicator is good enough on its own and should be combined with other indicators. And remember to always backtest your strategies.
