6.2 Volume, Open Interest, and Price

Once volume is defined, CMT Level I asks you to read it with price, then bring in open interest on derivatives and two volume-weighted price tools: volume-weighted average price (VWAP) and anchored VWAP. Independent OpenExamPrep teaching for this unit stays on implications: what a change in volume or OI says about a trend, how to see those changes on a chart, and how a volume-weighted average differs from a simple moving average. This is still Classical Techniques (33% of Level I): a price line becomes a sponsored or unsponsored story.

Implications of volume changes for price trends

Treat volume as sponsorship. Expanding activity in the direction of the trend says the crowd is transacting with the move. Contracting activity as price still extends says the move is traveling on less fuel.

Two extra readings show up on real charts.

Volume on the pullback, not only on the impulse. In a healthy uptrend, the pause or flag should be quieter than the rally that preceded it. A "pullback" that is busier than the advance is often not a pause; it is a fight.

Climax versus continuation. A single enormous bar after a long trend can be continuation (a new crowd arriving) or exhaustion (a climax). Context decides: where the bar sits in the swing, whether the close holds the extreme, and whether the next few bars follow through. Level I does not give a formula that labels every spike. It does expect you to hesitate before calling a climax bar "just more confirmation."

Volume can lead as well as confirm. Dry-up into a boundary, then expansion through the boundary, is the usual breakout script. Expansion that fails to follow through is the usual false-breakout script.

Identifying trends in price and volume on a chart

Do not stare at one histogram bar. Map swings, then compare volume at comparable points.

1. Mark the last several higher highs and higher lows (uptrend) or lower highs and lower lows (downtrend). That is the price trend. If you cannot find swings, you do not yet have a trend to confirm.
2. Compare volume on the impulsive legs (the legs that set the new high or new low) with volume on the corrective legs.
3. Compare volume at this break of a level with volume at prior breaks of similar levels.
4. Note relative volume, not only histogram color. A green bar can be the quietest bar of the week.

Worked sequence (a narrative chart, not a ticker):

• Weeks 1–2: price rises $40 → $46 on expanding volume. Pullbacks to $43–$44 are quieter. Price trend and volume trend agree.
• Weeks 3–4: price still makes $47, then $48, but each new high is on a smaller histogram than the $46 push. Swings are still higher highs, but volume is diverging.
• Week 5: a gap through $48.50 prints the heaviest volume of the month, yet the bar closes back inside the prior range. Effort without result — the breakout did not stick.
• Week 6: price loses $46 on rising down volume. The price trend has shifted; volume now confirms the downside.

That sequence is how a Level I item can ask you to identify the trend in price and in volume. The price trend turned later than the volume warning. That lag is the point of the unit.

VWAP

Volume-weighted average price (VWAP) is the average price of transactions over a period, weighted by the volume at each price:

VWAP = Σ (price × volume) / Σ volume

On a bar chart that does not show every print, platforms typically use a typical price for the bar — often (high + low + close) / 3, or the bar's close — multiplied by that bar's volume, then cumulate. The more volume that transacts at a price, the more that price pulls VWAP. A quiet drift through $50 moves VWAP less than a heavy block at $50.

Worked numbers. Three prints in a session: 100 shares at $10, 100 shares at $11, and 800 shares at $12.

• VWAP = (10×100 + 11×100 + 12×800) / 1,000 = (1,000 + 1,100 + 9,600) / 1,000 = $11.70
• The unweighted mean of the three prices is $11.00

The heavy print at $12 pulls the average toward $12. That is the entire point of volume weighting: size, not clock time, decides the mean.

Session VWAP (the default VWAP on an intraday equity chart) resets at the session open and builds until the close. It is not a 20-bar moving average. It is the running volume-weighted mean since the open.

VWAP entered the literature as an institutional execution benchmark. Berkowitz, Logue, and Noser (Journal of Finance, 1988) described the day's VWAP as the price a "naive" trader could expect. A buy filled below VWAP is a better-than-average purchase for that window; a buy filled above VWAP is worse than the day's volume-weighted mean. Sell-side desks still get graded against it. That origin is why VWAP is not "just another moving average": it is the market's dollar-weighted average print.

For a technician reading the same line:

• Price above a rising session VWAP: buyers have been the more aggressive side for that session.
• Price below a falling session VWAP: sellers have been more aggressive for that session.
• Price chopping through a flat VWAP: the session has not awarded durable control.

VWAP is porous. Prints can tag it and continue. Treat it as a level of interest — an objective average — not as a force field. Also remember the reset: an overnight gap starts a new session VWAP. Yesterday's VWAP is a different series unless you choose to keep measuring from that earlier point. That choice is the next tool.

Anchored VWAP

Anchored VWAP (AVWAP) uses the same formula as VWAP. The difference is the start. Instead of automatically resetting at the cash open, the user anchors the calculation at a chosen event and lets the average run forward from that bar. The 2025/2026 CMT digital curriculum flags anchored VWAP as a newer tool on the Level I map. You should be able to define it and say what the anchor is for, not only recite session VWAP. Brian Shannon, CMT, is the practitioner most associated with popularizing the tool on discretionary charts; the exam cares about the definition and the use, not a biography.

Typical anchors are meaningful market events, not arbitrary dates:

• A session, week, or month open (calendar anchors)
• A gap, earnings print, IPO first trade, or macro release (event anchors)
• A swing high, swing low, breakout bar, or all-time high (structure anchors)

From the anchor forward, every share or contract gets equal weight in the average. AVWAP therefore answers: what is the volume-weighted average price since that event? If price is above the AVWAP from a low, the average participant who transacted since that low is profitable on a long. If price is below the AVWAP from a high, the average long since that high is underwater, and the average short is not.

Control rules, stated carefully:

• Price above an advancing AVWAP: buyers have control from that anchor.
• Price below a declining AVWAP: sellers have control from that anchor.
• Repeated tests of a rising AVWAP that hold: the average is acting as interest/support.
• A break of a rising AVWAP that then caps bounces: control has likely flipped from that anchor.

The anchor choice is the subjective step. Two honest technicians can pick the earnings bar versus the gap bar and draw two different lines. What is not subjective is the math once the anchor is set. Compared with a simple moving average, AVWAP does not drop old bars on a fixed lookback; it cumulates from the event until you pick a new event. Heavy volume near the anchor has a long memory. That is a feature of the tool, not a setting to optimize.

How open interest rises and falls

Return to the three trade types. OI is not "volume with a delay." It moves only when opening and closing trades change the count of live contracts.

Worked count. Open interest starts the session at 10,000 contracts.

1. New long matched with new short, 100 contracts: volume 100, OI 10,100.
2. Existing long sells to a new long, 50 contracts (replacement): volume 50, OI still 10,100.
3. Existing long sells to an existing short who buys to cover, 200 contracts (both close): volume 200, OI 9,900.

Session volume is 350. OI ended 100 contracts lower. A busy day can be churn. A quieter day can still add overnight positions. Because one trade can raise, lower, or leave OI unchanged, you cannot infer the OI change from volume alone.

• OI rises when new longs and new shorts are both initiating. The tape can be a bullish campaign or a bearish campaign; the OI fact is the same: new positions are being created.
• OI falls when existing longs and existing shorts are both exiting: long liquidation and short covering.
• OI is unchanged when a new participant takes the other side of a closer. Day-session scalps that flatten before the official snapshot often show up in volume more than in OI.

Official OI is typically reported with a one-session lag. Do not invent a live OI tick on a multiple-choice stem unless the item gives it.

Implications of OI changes for price trends

Pair the price trend with the OI trend. The Level I idea is sponsorship by open positions, not just busy prints.

Put volume in the same table when the stem gives you all three:

Falling OI is the warning the unit wants you to name: the move may continue, but it is less well sponsored. Rising OI does not tell you direction by itself — it tells you that the direction of price is being matched by new positions. Always read OI with price, never as a standalone oscillator. The next section zooms out from one contract or one stock to the list underneath an index: breadth, leadership, and up/down volume.