CHAPTER 13
Volume-weighted Average
Originally presented in July 2001, this system tries to identify short-term correc-
tions that have exhausted themselves by ending with a final move in the direction
of the correction accompanied by an increase in volume. When this happens, the
system enters in the opposite direction if the market turns and takes out the high-
est high or lowest low for the previous two days. The direction of the correction is
indicated by the latest closing price in relation to a short-term volume-weighted
average (VWA), which is similar to a regular exponential moving average.
Calculating the VWA is a two-step process:
Calculate the current average volume (AV) in relation to the highest average
volume (HAV) and lowest average volume (LAV) of the lookback period. For
example, if the lookback period is set to nine days, as it is for this particular sys-
tem, calculate AV for the last nine days together with HAV and LAV for the same
nine days. Then, take the difference between AV and LAV and divide it by the dif-
ference between HAV and LAV. The result will be a value between zero and one.
If this relative value (RV) is increasing from one bar to the next, the average vol-
ume is not only increasing, it is also moving closer to a short-term extreme level.
Reverse the reasoning if RV is decreasing. The formula for calculating RV looks
like this:
RV (AV LAV) / (HAV LAV)
Multiply the closing price (C) for each bar by RV, and multiply the previous
bar’s VMA (PVMA) by one minus RV. Then add the two totals together to reach
the VWA for the current bar. The VWA for the first bar in the sequence will be its
closing price multiplied by RV. The higher the average volume, the higher the RV,153Copyright 2003 by The McGraw-Hill Companies, Inc. Click Here for Terms of Use.