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Moving Average (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:
- Calculate the average volume using every time period in the
chart.
- Calculate the volume increment by multiplying the average
volume by 0.67.
- 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.
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