TRADING TECHNIQUES

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A Volume-Sensitive Average
Elastic Moving Averages

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by Christian P. Fries, Ph.D.

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What if the period of your average fluctuated with volume? You'd have an elastic volume-weighted moving average (eVWMA), a natural replacement for standard moving averages. It's even more natural than on first thought, since it can also be regarded as an approximation to the average price paid per share. eVWMA differs from the usual average in that:

1 It does not refer to an underlying averaging time period (for example, 20 days, 38 days, 200 days). Instead, eVWMA uses share volume to define the period of the averaging.

2 It incorporates information about volume (and possibly time) in a natural and logical way.

3 It can be derived from, and seen as an approximation to, a statistical measure and thus has a solid mathematical justification.

I'll show you the concept and the formulation of the elastic volume-weighted moving average, using an Excel spreadsheet as an example.

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Christian Fries studied mathematics and physics. He has worked for information technology companies and banks in Europe.
He may be contacted at email@christian-fries.de.

Excerpted from an article originally published in the June 2001 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2001, Technical Analysis, Inc.

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