A Volume Moving Average is the simplest volume-based technical indicator. Similar to a price moving average, a VMA is an average volume of a security (stock), commodity, index or exchange over a selected period of time. Volume Moving Averages are used in charts and in technical analysis to smooth and describe a volume trend by filtering short term spikes and gaps.
As a rule, volume can be somewhat turbulent and, due to some large trades ("games" of the large institutional traders), you may see surges here and there. By using a moving average of volume, you can smooth out those single fluctuations in volume so it is becomes possible to evaluate the general direction of the volume (i.e., increasing or decreasing) visually, as well as receiving a numeric representation of the volume trend for further use with other indicators and trading systems.
Similar to the price analysis, there are several types of VMA. One of the most widely used VMAs is a Simple Moving Average applied to the volume that is calculated as the average volume over a specified period of time (number of bars):
Simple VMA(n) = (sum of N volume bars) / N
An exponential VMA is another type of moving average that applies weighing factors to reduce the lag in a simple moving average. It is widely used in analysis as well.
A VMA is the basic and simplest tool in analysis. This indicator could be could be analyzed by itself. At the same time, the majority of more complex volume-based technical studies use VMAs in their calculations. You can see a VMA in Volume Oscillator, PVO, and MVO formulas. Indirectly, a moving average is applied to volume in the accumulation/distribution, Oscillator Chaikina, OBV (On Balance Volume), and Chaikin Money Flow (CMF), etc. Consequently, VMA could be called one of the most important tools for use as in indicators.
One of the basic ways to analyze VMA is to monitor changes in its direction. In general, when the price of a security (stock, index or other commodity) price is moving up and we see a large increase in the VMA, it means that the intensity of bullish (buying) traders is increasing greatly. As soon as the VMA starts to decline after hitting its pick level during a price advance, it is signalling that the number of buying traders has begun to decrease and bearish (selling) traders may take over and reverse the trend downward.
In a similar way, an increase in a VMA during a price decline indicates an increase in the number of traders who are selling in panic. As soon as the VMA starts to move down after being at a high level during the price decline, it is signalling that the number of selling traders has been exhausted and that we may see a change in the mood and trend direction.
In the table below is a list of recommended Volume Moving Average (VMA) settings for various periods that are the best for signaling future market trends.
Table #1: Recommended VMA settings
|Period||SBV VMA Period||Fast VMA||Slow VMA||1 bar value|
|2-Hour Period||1-20 bars||1-20 bars||40-100 bars||1 minute|
|1-Day Period||5-30 bars||5-30 bars||60-100 bars||1 minute|
|5-Day Period||7-25 bars||7-25 bars||70-200 bars||5 minutes|
|15-Day Period||7-25 bars||7-25 bars||70-200 bars||15 minutes|
|30-Day Period||7-25 bars||7-25 bars||70-200 bars||30 minutes|
|60-Day Period||7-25 bars||7-25 bars||70-200 bars||1 hour|
|3-Months Period||3-8 bars||3-8 bars||40-80 bars||1 day|
|6-Months Period||3-8 bars||3-8 bars||40-80 bars||1 day|
|1-Year Period||3-8 bars||3-8 bars||40-80 bars||1 day|
|1.5-Year Period||3-8 bars||3-8 bars||40-80 bars||1 day|
|2-Year Period||3-8 bars||3-8 bars||40-80 bars||2 days|
|3-Year Period||3-8 bars||3-8 bars||40-80 bars||3 days|
|4-Year Period||3-8 bars||3-8 bars||40-80 bars||3 days|
|5-Year Period||3-8 bars||3-8 bars||40-80 bars||5 days|
|7-Year Period||3-8 bars||3-8 bars||40-80 bars||7 days|
|10-Year Period||3-8 bars||3-8 bars||40-80 bars||10 days|
|Weekly||3-8 bars||3-8 bars||40-80 bars||1 week|
|Monthly||3-8 bars||3-8 bars||40-80 bars||1 month|