You are here: Indicator Library gt VWAP and Moving VWAP VWAP and Moving VWAP VWAP is a trading acronym for Volume-Weighted Average Price, the ratio of the value traded to total volume traded over a particular time horizon (usually one day). It is a measure of the average price a stock traded at over the trading horizon. VWAP is often used as a trading benchmark by investors who aim to be as passive as possible in their execution. Many pension funds, and some mutual funds, fall into this category. The aim of using a VWAP trading target is to ensure that the trader executing the order does so in-line with volume on the market. It is sometimes argued that such execution reduces transaction costs by minimizing market impact (the adverse effect of a traders activities on the price of a security). VWAP starts its calculation over each market day so it is only visible on intraday time frames. Moving VWAP is an x-period volume-weighted moving average. 160On this 15-minute chart of AAPL, you can see that VWAP (orange) starts over each day whereas the Moving VWAP is a running 30-bar volume-weighted average. Please send all questions and comments to feedbackfreestockcharts If you need technical assistance, please contact our technical support department. Copyright 2015 by WordenVolume-weighted Exponential Moving Average (V-EMA) and the Directional Movement Indicator We collect Price and Volume data for some stock (or mutual fund), for the past N days, namely: (P 1 . V 1 ), (P 2 . V 2 ), (P 3 . V 3 ). (P N . V N ) and compute, with this info: Num (Now) EMA of last N values of (Volume)(Price) and Den (Now) EMA of last N values of (Volume) That doesnt explain how to calculate them Patience. Tomorrow, once weve got the Price, P N1 . and Volume, V N1 . we calculate: and Num and Den stand for Numerator and Denominator, respectively and 945 1 - 2(N 1) so, for N 14 (a 14-day V-EMA) wed have 945 1 - 215 0.867 To start this procedure (before weve got a bunch of Prices and Volumes) we just use Num (Now) (1 - 945) Volume x Price and Den (Now) (1 - 945) Volume Thereafter, we use the Magic Formula. Example Okay, suppose the closing Price and Volume are 23.50 and 5,250.9, in thousands of shares traded. Suppose, further, that were working with a 14-day moving average, so 945 0.867. and Num (Now) (1-0.867) (5,250.9) (23.50) 16,412 and Den (Now) (1-0.867) (5,250.9) 698.37 so V-EMA (Now) Num (Now) Den (Now) 16412698.37 23.50 hence. But thats just todays price Im glad you noticed. However, we need to have a starting value for Num and Den . Tomorrow, we suppose that our Price and Volume are 24.50 and 1,477.8 kilo-shares, so now we use Magic Formula : And so on. and so on. Right. As we continue, we generate a Volume-weighted Exponential Moving Average and. Is that what youre after A Volume-weighted. Well. uh. not exactly. Were really after a Volume-weighted Directional Movement Indicator ( DMI ). Ive forgotten what that is. Then go back and read the Technical Analysis stuff. However, in a nutshell, we calculate a sequence of Bull Points and Bear Points (depending upon the increases in the daily highs compared to the decreases in daily lows) and we then compute the Exponential Moving Averages ( EMA ) of these two sequences of Bull and Bear points, calling these EMA s DMI and DMI - and we get excited when DMI rises above DMI - because we then expect the stock to take off. so we look at their difference: ADX ( DMI ) - ( DMI - ) so that. Im sorry I asked. We want to consider the difference between the ordinary, garden-variety DMI and the Volume-weighted version, which well call VDI . Consider the following charts, where were doing the DMI thing. ignoring the volume of trades: Notice that the ADX dipped negative in mid-May. Maybe thats the start of a decline. Maybe we should sell. Maybe we should worry. However, this dip follows a period of low volume (see upper left chart). Had we included the Volume in our calculations. You mean, use VDI and VDI - and VDX ( VDI ) - ( VDI - ) instead of. Dont interrupt. If we include Volume. we find the following: and now, if we own the stock, were happy. The stock, we think, will quickly recover. But it could go the other way. I mean. Yes, it could go the other way. Including the Volume might make you very nervous. For example, heres another stock. Without using the Volume weighting (but just the standard DMI ), the ADX doesnt go negative in early May. However, if we include the Volume, the VDX goes negative. for a week or so. So whats the moral of this story The moral I guess we should think about buying (or selling) only when the VDX goes positive (or negative) by a significant amount. Whats significant Hmmm. good question. Id suggest using then wed get a percentage and wed relax unless the VDX rose above, say, 30 or fell below, say, -30: So if I see the VDX drop to -15, as in the above chart, I just go back to sleep. Theres a spreadsheet you can play with. You can choose ADX or the Volume-weighted VDX . It looks like this: Just RIGHT - click on the picture to download the. ZIP d spreadsheet. In the meantime, heres a few VDX s (as opposed to ADXs) to ponder: And, for a change of pace (because there aint no Volume figures for this Index), the ADX for the Nasdaq, below: But what about the big drop in the NAZ, last year Okay, heres a picture for that: So, it looks like ADX anticipated the drop. sorta. if we get excited about a 30 drop. Do you believe in this technical analysis stuff Well. uh. not really. For example, would this ADX stuff have kept you out of the Nasdaq, for all of the year 2000 Good question. lets see. Suppose we have 1,000 invested in the Nasdaq, in January, 2000 and we watch the ADX . When it drops below -30 we sell everything, put the money under a pillow and wait. When the ADX goes above 30 we buy back in. and stay in until it drops below -30 again. Looks like you made 12.9 for the year while the NAZ dropped. what Over 40. Yes, but notice that I sold in March and held the cash until the end of May. I also bought back in, sometime near the end of August, and got out later when the ADX dropped from 30 to -30 in about a week or so. and I lost money So, do you believe in this technical analysis stuff Well. uh. not really. So, guess what stock we should worry about, now, on May 27, 2001 How many guesses do I get Pfizer Are you sure Ask me again in a week or three. heres a more recent Pfizer . Aha So your prediction is lousy . Ya win some. Ya lose some. But is VDX . the volume-weighted stuff, really better than ADX . Uh. lets try it on some stock thats been around for a while, like maybe. How about General Electric. Its been around since the DOW had only a dozen stocks and Id say that. Okay, heres what well do: At the end of each week we note the Open, High, Low and Closing prices for that week. Using the average of these four prices, (OpenHighLowClose)4, we calculate the 4-week VDX . If the VDX rises above 30 we buy the stock at next weeks Opening price. If the VDX drops below -30 we sell the stock at next weeks Opening price and stick the money into money market, at 2 per year. On the right, the final result (from Jan85 to Jun01) Below, some close-ups, where the wee dots indicate switches between the stock and Money Market: So what was the annualized gain for the. For GE, the annualized gain from Jan85 to Jun01 was 20.0 and for VDX it was 23.1. What about ADX . What if you just ignored the volume For ADX the annualized gain was about 22.9. Big deal Aah. but if you had 100K invested for those years, itd make a difference of over 100,000 in your final portfolio - if you used VDX instead of ADX - from about 2.9M to 3.0M and thats significant, eh And if we just did a buy-and-hold with the GE stock, wed have about 2M by June01. That 4-week averaging. Is that the best number And that 30 figure - what about. The 30 is up to you. I call it the tranquility parameter. You want tranquility Choose - 100, relax, do nothing. You need the adrenaline rush Choose - 5. Aha So you looked at the historical data and picked the parameters, like 4 - week and 30 . so as to make VDX look good Well. uh, one must use historical data for each stock in order to gauge the appropriate parameters for that particular stock. I mean, not all stocks behave in the same way. Some are more volatile. Some are. Mumbo Jumbo. Besides, you ignore the cost of trading and what about longer time spans and. And if you ignored the volume and just used ADX . The annualized gain would have been. uh. 17.0, but I must say that it makes more sense to include the volume. After all, share prices associated with a higher volume surely are more important than the share price when just a few shares trade. There are usually more people involved. Volume-weighted prices give us an estimate of the average price paid for a stock. Using the price, alone, is like saying the size of a car - ignoring the weight of the car - that just its size alone will determine how much force is required to move the car. Its like saying that. For gyrfalcon and other Nortel - and XIU-watchers : NOTE: Theres a simple spreadsheet available. You just type in the Stock Symbol, click a button (while youre connected to the Net) and it downloads the pertinent data and plots the VDX (thanx to Ron M). The spreadsheet looks like this . To download the spreadsheet, RIGHT - click HERE and Save Target or Save Link. Trading With VWAP And MVWAP Source: Microsoft Excel The appropriate calculations would need to be inputted. Attaining the MVWAP is quite simple after VWAP has been calculated. A MVWAP is basically an average of the VWAP values. VWAP is only calculated each day, but MVWAP can move from day to day because it is an average of an average. This provides longer-term traders with a moving average volume weighted price. If a trader wanted a 10 period MVWAP, they would simply wait for the first ten periods to elapse and then would average the first 10 VWAP calculations. This would provide the trader with the MVWAP that starts being plotted at period 10. To continue getting the MVWAP calculation, average the most recent 10 VWAP figures, include a new a VWAP from the most recent period and drop the VWAP from 11 periods earlier. Apply to Charts While understanding the indicators and the associated calculations is important, charting software can do the calculations for us. On software that does not include VWAP or MVWAP, it may still be possible to program the indicator into the software using the calculations above. (For related reading, see Tips For Creating Profitable Stock Charts .) By selecting the VWAP indicator, it will appear on the chart. Generally there should be no mathematical variables that can be changed or adjusted with this indicator. If a trader wishes to use the Moving VWAP (MVWAP) indicator, she can adjust how many periods to average in the calculation. This can be done by adjusting the variable in our charting platform. Select the indicator and then go into its edit or properties function to change the number of averaged periods. Differences between VWAP and MVWAP There are a few major differences between the indicators which need to be understood. VWAP will provide a running total throughout the day. Thus, the final value of the day is the volume weighted average price for the day. If using a one minute chart, there are 390 (6.5 hours X 60 minutes) calculations that will be made for the day, with the last one providing the days VWAP. MVWAP on the other hand will provide an average of the number of VWAP calculations we wish to analyze. This means there is no final value for MVWAP as it can run fluidly from one day to the next, providing an average of the VWAP value over time. This makes the MVWAP much more customizable. It can be tailored to suit specific needs. It can also be made much more responsive to market moves for short-term trades and strategies or it can smooth out market noise if a longer period is chosen. VWAP provides valuable information to buy and hold traders, especially post execution (or end of day). It lets the trader know if they received a better than the average price that day or if they received a worse price. MVWAP does not necessarily provide this same information. (For more, see Understanding Order Execution .) VWAP will start fresh every day. Volume is heavy in the first period after the market open therefore, this action usually weighs heavily into the VWAP calculation. MVWAP can be carried from day to day, as it will always average the most recent periods (10 for example) and is less susceptible to any individual period - and becomes progressively less so the more periods which are averaged. General Strategies When a security is trending, we can use VWAP and MVWAP to gain information from the market. If the price is above VWAP, it is a good intra-day price to sell. If the price is below VWAP, it is a good intra-day price to buy. (For additional reading, see Advantages Of Data-Based Intraday Charts .) There is a caveat to using this intra-day though. Prices are dynamic, so what appears to be a good price at one point in the day may not be by days end. On upward trending days, traders can attempt to buy as prices bounce off MVWAP or VWAP. Alternatively, they can sell in a downtrend as price pushes up towards the line. Figure 2 shows three days of price action in the iShares Silver Trust ETF (SLV ). As the price rose, it stayed largely above the VWAP and MWAP, and declines to the lines provided buying opportunities. As price fell, they stayed largely below the indicators and rallies toward the lines were selling opportunities.
No comments:
Post a Comment