Technical Analysis, moving average, volume moving average, VMA, volume, charts, Nasdaq, market sentiment

Volume Moving Average is the simplest volume based technical indicator. The same as with price moving averages, VMA is an average volume of a security (stock), commodity, index or exchange over selected period of time. Volume Moving Average is used in charts and in technical analysis to smooth and describe 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. With the moving average applied to volume you can smooth out those single fluctuations so it is becomes possible to evaluate the general direction of the volume (i.e. increasing or decreasing) for visual analysis as well as to receive numeric representation of volume trend for further use in other indicators and trading systems.

In similar to the price analysis, there are several types of VMA. One of the most used VMA is Simple Moving Average applied to the volume that is calculated as average volume over specified period of time (number of bars):

Exponential VMA is another type of moving average that applies weighing factors to reduce the lag in simple moving average and which is widely used in the analysis as well.

VMA is the basic and simplest tools in analysis. This indicator could be could be analyzed by itself and at the same time majority of more complex volume based technical studies use VMAs as components in calculations. You may see VMA in Volume Oscillator, PVO, MVO formulas. Indirectly moving average is applied volume in the accumulation/distribution, Oscillator Chaikina, OBV (On Balance Volume), Chaikin Money Flow (CMF), etc. Because of that VMA could be called as one of the most important tools for indicators.

One of the basic ways to analyze VMA is to monitor changes in its direction. In general, when a security's (stock's, index's or other commodity's) price is moving up and we see big increase in the VMA it indicates that intensity of bullish (buying) traders is greatly increasing. Moment when VMA starts to decline after hitting its pick level during the price advance signals that the number of buying trader started to decrease and bearish (selling) traders can take over and reverse the trend down.

In similar way increase in VMA during the price decline indicates increase in number of traders who sell in panic. And moment when VMA starts to move down after being at high level during the price decline signals that the number of selling traders became exhausted and we may see change in the sentiment and trend direction.

In the table below is a list of recommended Volume Moving Averages (VMAs) settings for various periods as the best in showing signals of future market trends.

Table #1: Recommended VMA settings

Period	SBV VMA Period	Fast VMA	Slow VMA	1 bar value

Intraday Indicators
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
Short-Term Indicators
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
Mid-Term Indicators
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
Long-Term Indicators
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

The same as with price moving average the purpose of the selecting a period for moving average it to select the one that would smooth volume and make it less eratic, yet not too much because stronger smoothing increase lag and even may smooth out signals.

On the S&P 500 index charts below you can see a view of charts with different VMA for the same index and for the same period of time.

As you can see on the S&P 500 chart above, while it is still possible to recognize periods of high volume it is difficult to evaluate volume and see when exactly volume activity started to rise or started to decline. Therefore it is difficult to generate signals on the above chart without a VMA.

The chart below is similar to the chart above with the only difference that VMA(2) - volume moving average with 2-bar period setting - has been plotted on volume.

Now that you can see that the same chart with VMA (chart #2) helps to see all volume movement and it is easier to recognize periods of high and low volume activity, define when volume activity increases and when declines. Still, due to the low bar period setting of VMA, the VMA on the chart #2 looks erratic and it still could be difficult to generate signals based on this VMA. In this case, it could be recommended to increase the VMA period which should help to see the most important movements of the volume:

The next S&P 500 chart (chart #3) has 9-bar VMA. Now, when we increased bar period setting for VMA it became easier to spot periods when volume increases and periods when it started to halt.

You may see clearly the big volume surge on October 1-2. If you compare chart #2 and chart #3 you will see that, by following the rule to buy when VMA started to decline after it contoured the volume surge during the price decline, two "Buy" signals would be generated on the chart #2 (with 2-bar VMA) on October 1 at the market open and then another on the October 2 at the market open. On the chart #3 only one "Buy" signal would be generated in the middle of the trading session on October 2.

The last S&P 500 chart (chart #4) covers the same period of time, yet 20-bar Volume Moving Average applied to volume. You may see that with 20-bar period setting VMA became very smooth, yet the lag between volume and VMA became too big. If on the chart #3 the "Buy" signal would be generated on October 2, then on the chart #4 the "Buy" signal would be generated on October 5 (when VMA started to decline). If you go into further comparison of charts #3 and #4 you will see that VMA on the chart #3 spotted volume surge on September 24 and would generated the "Buy" signal on September 25 (when VMA started to decline), however VMA on the chart #4 over-smoothed this volume surge and missed this signal.

Before starting to use VMA, it is recommend to experiment with the VMA periods to find the best one that fit your personal trading style, selected time-frame and selected security (stock, index and other commodity).

Volume Based Technical Analysis

Volume Moving Average (VMA)

Volume Moving Average - VMA