Moving averages are among the most popular indicators for all types of trading. They are a valuable tool to gsmooth out the choppiness of the markets and provide an overview of average price movement. By weighting the average according to important factors such as the amount of volume traded, or how recently the price chage was made, patterns in price action can be found.
The Time Weighted Average Price (VWAP) is effectively a moving average that gives more weight to the most recent price moves. It is valuable in the sense that more recent data is given a higher priority, whilst still taking into account past data. An example of the TWAP on a 30 min crude oil chart is shown below.
An average in itself is never enough to base a trading decision on. However, it can be a valuable to to find levels of resistance and support, in conjunction with other indicators. The chart above shows a 100MA on a 30 minute chart of e-mini crude oil. In this example is it clear that the indicator is tracking an area of resistance for crude oil. However, this type of pattern will only occur when the market is in a trend, in all other circumstances the market will cross the MA at any time.
To find a more reliable entry signal, more than one indicator can be used. VWAP is a popular moving average weighted by traded volume. The chart below shows that points where they coincide can be good entry points for trending markets. It is important to only use this in a trending market, as they will often intersect and coincide during non-trending markets.
The skill here is clearly in identifying when a market is trending, which is one of the most important factors in all trading and investment. Markets will either be in balance and mean reverting (often with a ‘channel’), or be out of balance and discovering new price levels by trending. The type of trading has to match the market conditions as trying to trade a trend in a mean reverting market will only result in losses.