Variable Moving Average, often abbreviated as VMA, is an Exponential Moving Average.
It was developed by Tushar S. Chande in 1991. VMA automatically adjusts its smoothing
constant on the basis of Market Volatility. The Sensitivity of Variable Moving Average
keeps growing provided the volatility of data considered is increasing. A major
flaw in all forms of moving averages is that, they are unable to function properly
and predict future trend during Trending and Non-Trending movements of Stocks occurring
one after another. Similarly, when moving averages are determined over a longer
period of time, Moving Averages are unable to respond to trend reversals. This may
lead to disastrous trade signals. Variable Moving Averages distinguishes itself
from other moving averages on the basis of sensitivity. VMA functions far better
than other moving averages because it adjusts its smoothing constant according to
market conditions like Market Volatility.
If data provided is more volatile then latest figures are given more weight. VMA
not only shortens it average time period when market is trending but it also increases
its length if market is non-trending highly volatile markets. Any Tool can be used
to determine Volatility in Variable Moving Average. Most Common Tool to determine
Volatility is a 9 Period Chande Momentum Oscillator. Chande presented the idea of
using Volatility Index to determine the smoothing period. In order to function properly,
the Volatility Index must catch up the pace of market trend. If it is highly trending,
the Volatility Index must adjust its length to determine price trends of immense
importance. Another recent development in CMO is the use of Absolute CMO to determine
In order to Calculate Variable Moving Average, we must determine a method to calculate
Volatility Index. Standard Deviation or Chande Momentum Oscillator are frequently
used by Traders to determine Volatility Index.
Following is a formula to determine VMA with Chande Momentum Oscillator:
The basic difference between Variable Moving Average and other Moving Averages is
that, VMA doesn’t have any upper boundary to its Smoothing Constant.
Variable Moving Average has no upper limit to its Smoothing Constant. Volatility
Index can reach zero mark. At this point, the Average will not go further and will
match the previous Variable Moving Average. Similarly, when Volatility Index approaches
1, the Smoothing Period would be equivalent to ‘n’ as illustrated below.
The Value of CMO ranges between -100 and 100. In order to take Absolute value of
CMO, Divide the outcome by 100.