Volume Weighted Median Price (VWMP)

The volume is indeed crucial for confirming price moves and understanding market conviction. While many traders are familiar with VWAP (Volume Weighted Average Price), this indicator introduces a lesser-known but powerful cousin: the Volume Weighted Median Price (VWMP).

What is VWMP?

Unlike VWAP, which calculates the average price weighted by volume over a period, VWMP identifies the median price level weighted by volume.

Think of it this way: If you line up all the trades within a specific lookback period, sorted by price, and then start accumulating the volume traded at each price level, the VWMP is the price level where 50% of the total volume occurred below it, and 50% occurred above it.

It essentially finds the "middle ground" of trading activity based on where the bulk of the volume actually traded, not just the average price.

Key Difference: VWMP vs. VWAP

• VWAP: Volume Weighted Average Price. Sensitive to outliers (single large trades at extreme prices can skew the average).
  
• VWMP: Volume Weighted Median Price. More robust to outliers. It represents the price that splits the period's volume distribution in half.
  

Because it uses the median, VWMP can sometimes provide a more stable or representative level of the "typical" price where significant volume is changing hands, especially in volatile markets or when large, anomalous trades occur.

How to Interpret and Use VWMP in trading

The VWMP plots as a line on your chart, similar to a moving average or VWAP. Here are a few ways traders might use it:

Dynamic Support and Resistance:

Like VWAP, the VWMP line can act as a dynamic level of interest.
Watch how price interacts with the VWMP. Consistent acceptance above VWMP might suggest bullish control and potential support.
Consistent rejection or acceptance below VWMP might indicate bearish control and potential resistance.

Trend Filter / Confirmation:

Uptrend: Look for price consistently staying above the VWMP line. Pullbacks to the VWMP that hold could offer entry opportunities.
Downtrend: Look for price consistently staying below the VWMP line. Rallies to the VWMP that fail could present shorting opportunities.
Use it to filter trades: Only take long trades if price is above VWMP, and short trades if below.

Mean Reversion Potential (Use with Caution):

When price extends significantly far away from the VWMP, some traders might look for potential reversion back towards this volume-based median level.
Important: This should not be used in isolation. Always look for confirmation from other indicators (like RSI, Stochastics, or candlestick patterns) before trading counter-trend reversions.

Confluence with Other Indicators:

VWMP works best when combined with other analysis tools.
Look for confluence: Does the VWMP align with a key Fibonacci level, a standard moving average, or a prior support/resistance zone? This confluence strengthens the level's potential significance.

Considerations

• Lookback Period: The length input is crucial. A shorter period makes VWMP more responsive to recent action; a longer period makes it smoother and reflects longer-term volume distribution. Experiment to find what suits your timeframe and trading style.
  
  
• Lagging Nature: Like all indicators based on past data, VWMP is inherently lagging. It reflects past volume distribution, not the future.
  
  
• Market Context: Its effectiveness can vary depending on the market conditions (trending vs. ranging) and the asset being traded.