|
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:
-
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.
Back to Moving Averages
|
