Volume Weighted Moving Average (VWMA) in forex trading is a technical indicator that you can use to know the average price data because it gives more weight to periods (standard unit time that is used to monitor asset) that trading volume is high.

It is not like simple moving averages (SMA) which assign equal importance to each data point, but VWMA includes trading volume in its calculation.

This means that periods with higher volume will have a greater influence on the average price. This makes VWMA to be useful in markets where volume can signal important shifts in momentum or trend direction.

VWMA  accounts for volume and helps traders get a more accurate picture of where the price might be heading based on the strength of market participation.

VWMA is used to confirm trends, identify potential reversal points, and optimize entry and exit decisions in various financial markets, including Forex, stocks, and cryptocurrencies,

Volume Weighted Moving Average (VWMA) Calculation

The calculation of VWMA is simple and forward. In forex trading, the formula  for Volume Weighted Moving Average includes both price and volume data to create a weighted average:

VWMA Formula: 

Where: VWMA = ∑ (Pi × Vi) ÷ ∑Vi

• Pi​ is the price at each period.
• Vi​ is the volume traded during each period.
• ∑ (Pi × Vi) represents the sum of price multiplied by volume.
• ∑Vi is the total volume over the specified periods.

When you understand how to calculate this indicator, you will be able to analyze the market properly. 

Analyze Volume Weighted Moving Average (VWMA)

When the price is above the VWMA, it generally indicates bullish momentum supported by significant volume. This suggests a continuation of the uptrend.

Whereas, when the price is below the VWMA, it reflects bearish sentiment showing a potential downward pressure.

Traders often use the VWMA in combination with other indicators or moving averages to confirm trends. A crossover of the price above or below the VWMA can signal potential trend reversals or the start of new trends.

Volume Weighted Moving Average (VWMA) Trading Strategies

The whole reason for knowing any technical analysis tool is to apply them in your trading trading and the following are ways in which you can do so:

1. Confirm Trends

Traders often rely on the VWMA to double-check if a trend is authentic. If the price stays above the VWMA consistently, it’s a sign that the uptrend is solid.

But, if the price is hanging below the VWMA, it confirms that a downtrend is in play.

2. Understand VWMA Crossovers

A reliable format is to use the VWMA alongside another moving average, like the SMA or EMA. When the VWMA crosses above one of these other averages, it shows that it is a good time to buy. If it drops below, that means that it’s time to sell.

3. Support and Resistance

VWMA can act as a flexible support or resistance level.  VWMA in an uptrend serves as a strong support line where the price might bounce back up.

But during a downtrend, it acts as a resistance and blocks the price from rising.

You should look for these bounces as potential points to enter the market.

Volume Weighted Moving Average (VWMA) Limitations

The following are the setbacks of this indicator which of course surfaces on rare occasions:

1. Lagging

Just like every other moving average, VWMA is a lagging indicator and may not react quickly enough to sudden price changes or market reversals.

2. Volume Dependency

VWMA heavily relies on volume data, which can sometimes be distorted by market anomalies such as sudden increases in trading volume without a corresponding price movement.

Examples of Scanners and Strategies that Use VWMA

Many traders include VWMA in their scanning tools to know potential trading opportunities. For example:

Bullish Crossover Scanner scans for opportunities where the price or another moving average crosses above the VWMA which signals potential buy opportunities.

Bearish Divergence Scanner looks for divergences between price movement and VWMA direction to see potential reversals or weakening trends.

VWMA Pullback Scanner finds stocks or currencies that are pulling back to the VWMA in a trend and offers potential entry points.

Volume Weighted Moving Average Vs. Modified Volume Weighted Average Price

The MVWAP (Modified Volume Weighted Average Price) is often confused with VWMA, but there is a huge difference in how they deal with volume.

VWMA averages price data over a specific period,  but MVWAP looks at the average price weighted by volume but considers the entire trading session or a broader range of data.

MVWAP tends to give a more long-term perspective compared to the shorter-term signals that VWMA provides.

Advantages of the Volume Weighted Moving Average

1. More Accurate Trend Signals

 VWMA is seen in both price and volume. It offers more accurate trend signals than simple moving averages.

2. Responsive to Market Conditions

Because VWMA is very sensitive to the volume of the market, it responds more to shifts in market sentiment and participation.

3. Useful in High-Volume Markets

 VWMA provides a clearer picture of trend strength in markets where there is high volume. 

Volume Weighted Moving Average and Volume Weighted Average Price

VWAP is mainly used to find the average price of a security over a single trading day. It’s popular for intraday trading because it helps traders see if they’re getting a good price compared to the day’s average.

VWMA, however, works on different time frames. It focuses more on spotting trends and showing good entry or exit points. This makes VWMA a good choice for both short-term and long-term trading strategies.

VWMA vs EMA

The EMA (Exponential Moving Average) focuses more on recent price data, so it responds quickly to price changes.

This makes it useful for markets that move fast where traders need to react to sudden shifts.

But, the VWMA (Volume Weighted Moving Average) gives more attention to periods with higher trading volume. This makes it ideal when volume is used as a big part in driving price movements.

So, if you are trading in a volatile market, you will prefer the EMA for its speed. But if you believe volume is important in determining price direction, VWMA is the better choice.

Frequently Asked Questions

1. How does the Volume Weighted Moving Average (VWMA) differ from a Simple Moving Average (SMA)?

The major difference between VWMA and SMA is that VWMA gives more weight to periods with higher trading volume and that makes it more responsive to price movements supported by important market activity. But, SMA treats all data points equally, regardless of volume.

2. Is VWMA better suited for short-term or long-term trading strategies?

VWMA can be used in both short-term and long-term trading strategies.

However, it is more effective in shorter time frames where volume is determining price trends.

Traders often use VWMA for intraday trading or to confirm trends in high-volume markets.

3. Can I combine VWMA with other indicators for better trading signals?

Yes, VWMA is often combined with other indicators such as the Exponential Moving Average (EMA), Simple Moving Average (SMA), or Volume Weighted Average Price (VWAP) to improve trading signals.

For example, crossover strategies using VWMA and another moving average can help you to know potential buy or sell opportunities.

4. What is the best setting for VWMA?

The best setting for VWMA depends on your trading goals and the time frame that you choose. You can use these common settings:

If you are a short-term trader, you should use a VWMA with a period of 10 to 20 to capture trends that are moving very quickly and influenced by volume.

But if you are long-term trader or you are among those who analyze broader trends, the best option is a VWMA period of 50 to 200. 

The reason is that they allow you to see clearer trends that are less sensitive to short-term volume increases. 

Conclusion

The Volume Weighted Moving Average (VWMA) in Forex trading is an indicator that helps you know price volume and how you can calculate it in order to get the desired result.

It allows traders to assess price trends with the added perspective of market participation, making it ideal for identifying key turning points, validating trends, and optimizing trading strategies.

While VWMA is limited in fast-moving markets, it remains an amazing tool for traders who wants to enhance their technical analysis.