Moving Averages - Volume Adjusted

Description

Dick Arms, well-known as the developer of the Arms Index and the equivolume charting method developed a unique method for calculating moving averages. In keeping with his prior work, the calculation method incorporates volume and is appropriately called a volume adjusted moving average .

The calculation for a volume adjusted moving average is somewhat complex; however, it is conceptually easy to understand. All moving averages (even volume adjusted) use some type of weighting scheme to "average" the data. Exponential and weighted moving averages assign the majority of weight to the most recent data. Simple moving averages assign the weight equally across all data. Variable moving averages assign the majority of the weight to the most volatile data. And as its name implies, volume adjusted moving averages assign the majority of weight to the day's with the most volume.

A volume adjusted moving average is calculated as follows:

1. Calculate the average volume using every time period in the chart.

2. Calculate the volume increment by multiplying the average volume by 0.67.

3. Calculate each period's volume ratio by dividing each period's actual volume by the volume increment.

Starting at the most recent time period and working backwards, multiply each period's price by the period's volume ratio and cumulatively sum these values until the user-specified number of volume increments is reached. Note that only a fraction of the last period's volume will likely be used.