Elastic Volume Weighted Moving Average & Envelope

The Elastic Volume Weighted Moving Average & Envelope indicator provides a statistical measure that incorporates volume to determine the moving average period, offering a precise approximation of the average price paid per share.

Usage

The Usage of the Elastic Volume Weighted Moving Average (eVWMA) revolves around identifying the average cost basis of market participants. Because the script uses volume as the primary driver for its "elasticity," the moving average reacts more dynamically to periods of high trading activity compared to standard time-based moving averages.

• Trend Identification: Traders can use the central eVWMA line to determine the prevailing trend. When the price remains above the eVWMA, the market is generally considered to be in an uptrend with a positive volume-weighted cost basis.
• Envelope Analysis: By enabling the "Draw Envelope" option, the indicator plots additional lines based on the High and Low prices. This creates a channel that helps identify potential overextended price levels or volatility bands.
• Volume Calculation Toggles: Users can choose between using a rolling sum of volume (defined by the Length setting) or the cumulative volume since the start of the data. Using cumulative volume provides a broader perspective on the average price paid across the entire available history.

Details

The eVWMA is based on the concept that volume represents the flow of shares or contracts, and thus the "period" of the moving average should be a function of this flow. This concept was popularized by Christian Fries.

The calculation is recursive, where the current value is a weighted average of the previous value and the current price, weighted by the ratio of current volume to the total "floating shares" (represented by the volume multiplier). Unlike a standard Simple Moving Average (SMA), which gives equal weight to every bar in a window, the eVWMA gives weight based on the proportion of volume traded. This makes it an effective tool for approximating the point at which the average share was purchased.

Settings

• Length: Determines the lookback period used for the sum of volume when "Use Cumulative Volume" is disabled.
• Use Cumulative Volume: When checked, the script uses the cumulative sum of all volume on the chart as the multiplier for the average. When unchecked, it uses the sum of volume over the specified Length.
• Draw Envelope: Toggles the visibility of the upper and lower bands, which are calculated by applying the eVWMA formula to the High and Low price series respectively.

FAQ

How does eVWMA differ from a standard VWAP? While both consider volume and price, VWAP typically resets at the start of a specific session (daily, weekly, etc.), whereas the eVWMA is a continuous moving average that uses a recursive formula to weight prices based on the total volume or a rolling volume window.

What is the significance of the "Use Cumulative Volume" setting? Enabling cumulative volume treats the entire chart history as the base for the average price calculation. This is useful for long-term investors looking for a macro cost basis, while disabling it (using the rolling sum) is more suitable for active traders focusing on recent price action.

How can I access this indicator? You can get access on the LuxAlgo Library for charting platforms like TradingView, MetaTrader (MT4/MT5), and NinjaTrader for free.