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Volume Weighted Average Price (VWAP) Indicator explained

2021-03-23

2021-03-23

VWAP Indicator: what is VWAP in trading and how to use itOleg Tkachenko

VWAP indicator is an excellent alternative to the Moving Averages. Moving Averages are the simplest and most popular indicator, one of the basic tools in any trading platform. Dozens of basic and combined indicators are based on the MA principle.

For example, classic Bollinger Bands are, in fact, the very same moving averages with a standard deviation in the formula, which are located on both sides of the price and form a channel. And yet, like any other indicators, the moving averages are not without drawbacks: they calculate the average price based on the prices of separate time frames but do not take into account trading volumes in them. The attempts to improve this basic tool resulted in the appearance of Exponential Moving Averages, LWMA, WMA, and other MA variations.

The article covers the following subjects:

What is the Volume Weighted Average Price (VWAP)

Now, let us explore what is the vwap. VWAP (Volume Weighted Average Price) is one of the moving averages derived indicators that takes trading volumes into account when averaging prices. VWAP is the abbreviation of the volume-weighted average price. In simple terms, the Volume Weighted Average price is the cumulative average price with respect to the volume.

First, let me remind you what the [moving average][1] is:

SMA (simple moving average) is the average value of a certain type of price for a fixed number of periods. For example, in accordance with the settings in this screenshot, the value of the simple moving average will be based on the closing prices (Close) of the last nine one-minute intervals - the chart has the one-minute timeframe and the period of 9.

This approach to calculating the average price does not reflect the real picture at all. I will give an example:

  • Suppose we have a box with 100 apples, each of which costs $2. We put there an apple of another variety worth $1. The average price of an apple will be (1 + 2) / 2 = $1.5. It doesn’t matter how many apples of two varieties there are in the box – 100 or 1,000 - the average price will remain unchanged while there are two varieties in the box. 

But if this value is calculated for a box with 101 apples, then the total price will be 100 * 2 + 1 = $201, and the average price of an apple will be 201⁄101 = $1.99. You will agree that the difference between 1.5 and 1.99 dollars is significant; the second figure reflects the real situation much better. This average value is called the weighted average price; that is, it’s the price taking into account the number of goods (101 apples) in the calculation.

The same applies to Forex. The SMA from the example above considers only the price recorded at the end of the time frame but does not take into account that the trading volume could be $1 million in the one time interval, and in the other - 10 thousand. This was taken into account in the VWAP indicator.

VWAP Indicator Definition

Volume Weighted Average Price (VWAP) is an indicator used to determine the average value of a price weighted by volume. The VWAP indicator takes into account the trading volume for each timeframe. And the larger this volume, the greater the weight of the timeframe price in the final result.

WAP calculation: formula & algorithm

The formula for the VWAP calculation is as follows:

Let’s look at each value and action in the vwap formula step by step:

  • Let’s start with Price. The average price value for the VWAP calculation may be based on different datasets. In some versions of the indicator, the type of price can be changed. For example, using only average market closing prices, low and high; or the average value of the market’s opening and closing prices, the highest and lowest prices of the day.

  • When setting up average prices, you can see the following values ​​in the indicator:

Median price - calculated as follows: (High + Low) / 2

Typical price - calculated as follows: (High + Low + Close) / 3

Weighted price - calculated as follows: (High + Low + Open + Close) / 4

  • Then, according to the formula, the obtained value of the average price is multiplied by the volume.

  • The numerator is calculated: this is the aggregate indicator of the average price’s product and the cumulative volume over the entire period. The entire period means the number of candles specified in the indicator settings (VWAP period).

  • The denominator is calculated: total volume for the entire period.

  • The vwap ratio of the numerator to the denominator is calculated.

The weighted average price is calculated for the specified period. You can calculate it for various timeframes. The VWAP indicator calculates data from the beginning of the period specified in the settings (for example, hour, day, week) to the end moment in cumulative mode.

The data are not averaged. In the indicator settings, it is also important to set up the correct time, which must be the same as the time of your broker. Also, the trader needs to indicate the desired number of periods that should be taken into account when calculating VWAP. VWAP results will be presented in the chart as a line

The indicator does not show individual large positions in one direction or another. It displays the price level with a relatively high or low level of volume, which is a trading benchmark showing high or low liquidity.

VWAP is a trend indicator that is somewhat similar to the classic moving averages, which also average the price. The fundamental difference is the calculation basis. In MA, the calculation is based on the price that comes to the terminal from the quote provider (this is a simplified description). VWAP “pulls up” volume data from Globex, the trading floor of the Chicago Mercantile Exchange.

This is the reason the indicator is fee-based. In free versions, VWAP uses tick data of an individual broker, and since each broker has different data, the result will be different.

This flaw explains why traders still prefer moving averages. Professional traders use paid packages, including VWAP with advanced settings (for example, packages from[ Volfix][2]). Beginners and medium- level traders prefer to save money. And since the free version of the indicator is very reduced in terms of settings and VWAP readings are different on the terminals of different brokers, traders choose moving averages.

In the stock market, this VWAP coefficient is used more often than in the currency market. With big trade volumes, the VWAP stock value is a sort of estimated indicator that allows you to see the difference in the execution price of your order in comparison with the average market price.

If the order is closed at a price close to the indicator value, then the execution of the price of the stock definitely “no worse” than that of other market participants. Ideally, the order execution price should be better than the stock VWAP value.

Important! Above, there is a general calculation principle. But there are significant differences between the free VWAP MT4 version and the paid MT4 versions of the indicator, Thinkorswim, QUIK, and stock market platforms. For example, the settings are different:

1. Settings of the VWAP indicator for MT4:

In this version of VWAP in MT4, this is an analog of moving averages with one difference. When weighing the price, the indicator takes into account the trading volumes of each candlestick. There are two variables in the settings, period and shift.

2. Settings of ClusterDelta VWAP indicator:

  • Instrument — the asset ticket.

  • Update in sec — the period of the WVAP chart updates. Too frequent updates may result in incorrect chart data; you’d better set the value of one minute or longer.

  • The new calculation starts each Monday. Europe means the count starts at the beginning of each new European session. Likewise for other sessions, as well as exchange sessions - CME, NYSE.

  • Amount – the number of charts analyzed.

  • MetaTrader GMT — the time zone of the platform operation. It is set manually if the market is closed.

  • VWAP_Period — the period, based on which, the chart is drawn. For example, for the specified value ‘Daily’, the report starts from the beginning of trading. If the VWAP period is weekly, the analysis goes on from Monday till Friday inclusive. 

There are also the settings for square standard deviations ‘numDev1 — numDev6’. In the chart, it is displayed like this: Central main line of the indicator and 6 lines, 3 on each side, forming channels. You can see something like this in the Bollinger Bands indicator. You can read more in the article devoted to [Bollinger Bands Indicator in Forex Explained][3].

This VWAP version has more settings and is differently displayed in the chart. You can add to the main line a series of Volume Weighted Average Price indicators of different timeframes – weekly, daily series in the same chart. The indicator calculation base has also been changed.

The weekly VWAP is calculated from Monday to Friday; daily VWAP considers 24 hours after the opening of the trading session, etc. Data are calculated per minute from the beginning of the period to the current moment in the cumulative mode without averaging.

Next, I will deal with the free VWAP indicator for MT4 and MT5, which is a simplified version available on the Internet.

How to calculate vwap on excel Sheet

The VWAP calculation in Excel is needed to check the correctness of indicator data in the chart. For example, you downloaded a VWAP version from an unknown source and don’t understand the cypher. How to check if this is the same indicator or some other algorithm called VWAP? Create a table in Excel and compare the obtained values with the data provided by the indicator.

Step 1. Export the quotes from MT4. In the MT4, click on the Tools menu and enter the History Center tab. Next, select the needed currency pair and timeframe.

Click on the Export button and save the file in the csv. format.

Step 2. Open the Excel file and edit it. The exported data are arranged in one column of digits, separated with a comma. Each line corresponds to the date.

For the calculation, I will use the Median Price, so I only need two types of prices, Open/Close and volumes. For example, the last 30 values. Volumes are the last six digits. The prices I want are at the beginning; they are after the date and before the volumes.

I will extract the data using the LEFT() and RIGHT() functions. If you do not know how to apply these functions, write in the comments, and I will explain in more detail. If you know an easier way to export the data into Excel in a convenient format, share it in the comments, please!

Remember to convert the data to a number if a green triangle appears in the corner of the cells. Also, replace the dot separator with a comma.

Step 3. Calculate the numerator of the fraction in column F. The average open and close prices are multiplied by volume. Stretch the cells.

F2: =(C2+D2)/2*E2

Step 4. Calculate the VWAP with period 12:

G13=F13/E13

Period 12 means that the data are calculated based on the last twelve candlesticks, that is, the last twelve cells. So, you enter the formula only in the twelfth line, G13.

 You can download the template via [this link][4].

Where to download VWAP for MT4

VWAP has several versions, but most of them are fee-based. A simplified version of VWAP indicator MT4 with a minimum of settings can be [downloaded here][5]. After you download the VWAP, you should add the indicator to the platform. In the MT4 top menu, click on “File / Open Data Catalog,” go to the MQL4 / Indicators folder, and past the indicator file there.

Restart MT4, the indicator will appear in the “Insert / Indicator / Custom” submenu. You can download the VWAP indicator template [here][6]; the template has the parameters suitable for the [MT5][7].

  • Important! The MT4 archive offered for download is a simplified version of the indicator without additional square deviation lines. Archive of the VWAP for MT5 is a free extended version with square deviations, but it is not complete either. You get the VWAP full version after you have a paid subscription with the developers.

Forex VWAP Indicator Signals

1. If the price has been above the indicator for a long time, then the trend is upward. If the price is below the VWAP line, this is a sign of a downtrend. We are talking about a long period, which is usually analyzed for the market general assessment before opening a position.

The green line is the price line; the white one is the Volume Weighted Average Price line. The yellow rectangle is the zone of the growing trend; the blue is the declining one. Please note that in both zones at the end of the trend, there is a reversal, which could not be predicted by the VWAP. That is why the indicator is used only to confirm signals in certain areas.

2. If the VWAP is located above the price, this indicates that a long position (purchase) will be opened at a lower price than the average market quotes. One of the high-risk strategies is based on opening buy positions when the price is below the VWAP but reverses up. In accordance with conservative strategies, a long position is opened when the price crosses the indicator from bottom to top, and a short position is opened when the price crosses the indicator from top to bottom.

3. If the vwap crosses the price chart several times, the market is flat.

4. If the VWAP starts to decline steadily, this indicates that trading volumes are declining and interest in the asset is falling. Such a signal may be a harbinger of a flat.

There is no single recommendation for building volume weighted average price trading strategy, and you could follow the same tactics as when trading with moving averages. The most common use of the indicator is to build the main VWAP line and three deviation lines that form the channels.

VWAP Trading Strategies

VWAP trading strategies depend on the indicator version you are going to employ. You can use the version for the MT5, the closest to the full one, for channel trading strategies. The channel’s borders will be the average square deviation. You can employ a simplified VWAP version for the MT4 similar to the MAs.

You install two VWAP indicators with different periods, look for signals at the time of their crossing, and confirm the trading vwap ideas to buy or sell with other technical tools. I will cover several Volume Weighted Average Price trading strategies below.

VWAP Pullback for five-minute timeframe

This trading strategy is based on the Moving Averages and the VWAP with the same period.

Input parameters:

If you use other MA modifications instead of the SMA, you can face lagging signals. But you can test other types of MAs on other currency pairs. Perhaps, the application of EMAs, for example, on less volatile assets, could be justified.

Entry conditions:

  • Long position. After the indicators cross, the candlestick body should close higher than both lines. The red line of the faster SMA should cross the white slower VWAP line from bottom to top.

  • Short position. After the indicators cross, the candlestick body should close lower than both lines. The red line of the faster SMA should cross the white slower VWAP line from top to bottom.

Two important moments:

  • The candlestick must be completely above or below the lines of both indicators. The moment the price crosses the indicator lines is only an early signal.

  • The primary signal is when the price crosses the lines of both indicators, the crossing of the VWAP and SMA is a confirming signal.

Example:

The SMA and the VWAP usually move along with almost the same trajectory; therefore, the moment of their crossing is an amplifying signal.

  • At point ‘1’, a falling candlestick breaks through both indicators. Although VWAP and SMA do not cross, both indicators are directed downward. At the next candlestick, we open a short position and insure it with a trailing stop.

  • At point ‘2’, indicators cross, but as the price has been below the VWAP for a long time. It signals a downtrend, which could end soon. There is no entry signal.

  • At point ‘3’, the price closes higher than both indicators; the red line crosses the white line from bottom to top. We open a long position.

  • At point ‘4’, the price closes below the indicators; the closed candlestick has very little body and shadows compared to the previous ones. Most likely, the bear trend is exhausting, and it makes to expect the upward price movement to continue. 

  • There are no signals at points ‘5’ and ‘6’, as the price has been for a long time above the indicators.

  • At point ‘7’, the trend could reverse. But the signal is weak, as both indicators have a slight slope. We can take a risk and enter a trade now or wait until a few following candlesticks form.

  • We exit the trade at point ‘8’ or ‘9’. At the eighth point, there is a candlestick with a small body, which signals a likely reversal. At the ninth point, there is an upward engulfing candlestick. 

VWAP Price Action

The Price Action strategy suggests a search for a complex pattern composed of five or more candlesticks. Volume Weighted Average Price is employed here as a supplementary tool to confirm the trading signals. By and large, a Price Action trading strategy looks like this. You draw the support/resistance levels, Fibonacci retracements, look for price chart patterns, such as a Triangle, for example, and others.

Next, you spot the level breakouts. As the level breakout could be a correction, you receive an additional confirmation signal from the VWAP. The VWAP signal is sent when, at the moment of the level breakout, the price move should also break out the indicator line, or the candlestick should close below/above the indicator, depending on the trade direction. VWAP confirms that trading volumes are increasing, and the price movement will continue after the level breakout.

Example. Input parameters:

There is a sideways trend in the hourly chart. The price movement is getting flat; the candlestick bodies are getting shorter, the price movement almost coincides with the VWAP. Along with some extreme points, marked with the red arrows, we can draw a Triangle pattern. The breakout of the Triangle borders could mean the beginning of a new trend.

The rising candlestick breaks out the Triangle upside and closes higher. This candlestick also closes above the white VWAP line, which was broken out by the preceding candlestick. The VWAP sideways movement turns into a rise, and we can enter a long trade at the next candlestick (blue arrow) or after it.

The exit conditions depend on your trading style. I would refer to the patterns in this case. Following four candlesticks after the trade was entered, there appears a Doji candlestick, where I would close the position. The trade would yield a profit of about 25-30 pips, depending on the entry and exit points of the trade.

Channel trading strategy with VWAP Deviation lines for MT5

The VWAP settings for MT5, whose template you can upload via the link above, provide an opportunity to draw the square deviation lines, which make up a channel. You specify the coefficient in the setting. The recommended settings are as follows:

The problem with channel indicators is that they follow the price and then repaint. A candlestick touching the channel boundaries does not mean that the price will turn to the middle of the channel, it can go further, and the channel will widen following the price movements.

The strategy offered here eliminates the ambiguity. The trades are entered when the price exits the consolidation zone. The signal is sent when the price sharply exceeds the channel boundaries. You can apply the trading system in the five-minute timeframe, 10-minute chart, or M15 interval.

Input parameters:

  • Currency pair — any.

  • TImeframe — М5-М15.

  • Indicator VWAP for МТ5.

Entry signals. The market is trading flat, and the channel is getting narrower.

In a perfect situation, if the channel is horizontal and it is clearly visible compared to the previous price movement. When the channel is narrowing, it indicates a potential signal; but the narrowing should last during at least three-five candlesticks. The entry signal appears when the channel sharply broadens. In the chart, it looks like this:

  • There appears a relatively long candlestick, compared to the previous ones, in a certain direction.

  • The extreme line of the channel, towards which the candlestick went, sharply changes the slope angle. 

You open the position at the next candlestick after the signal candlestick touches the last channel line in the direction of the emerging trend.

Example 1.

There is a clear visible narrowing of the horizontal channel. At point ‘1’, the price breaks the extreme channel line, which sharply changes the slope down. At the next candlestick, we can enter a trade. Candlesticks 2 and 3 confirm that the trading decision is correct.

Example 2.

In both situations (red boxes), following the channel narrowing, the price sharply swings beyond the channel borders, and the channel widens. Both signals are accurate.

Pay attention to the zone of the blue box. There is also a narrowing of the channel, a breakout of the border by candlestick downside, and a change in the slope of the Volume Weighted Average Price indicator line. But the narrowing of the channel lasted less than 3 candles - this suggests that the market quickly left the zone of uncertainty. With such a signal, I would not recommend entering a trade for conservative traders.

The disadvantage of the channel strategy is that signals are rare, and you have to expect the consolidation zone. Therefore, the recommended timeframes are M5-M15, the frequency is one signal per 1-3 days. The idea of the strategy is simple; therefore, I recommend also paying attention to patterns or adding oscillators. If you manage to develop this idea into a full-fledged trading system, share your experience in the comments.

Support and Resistance with the VWAP

In a trending market, the Volume Weighted Average Price indicator line could serve as a support or resistance level. If the current price is higher than the average price over the chosen period, the trader overpays for the asset.

If the current market price is lower than the average one, the trader buys an asset at a more beneficial price. If the price is close to the VWAP line, the current price is balanced. This is a key level where the trend is likely to continue or reverse.

Following a downtrend, the price is trading flat for some time, several times breaking through the white line of the Volume Weighted Average Price, indicating bearishness. Next, a bullish starts, and the indicator line becomes a support level, from which the price rebound and goes up.

At the first box, there is again uncertainty. Bears are trying to press the price down, but the price again rebounds from the VWAP line in the chart in the main trend direction. Close to the second box in the chart, there is uncertainty. After that, the VWAP turns into a resistance level.

How to use VWAP: example

This strategy, one of the simplest strategies out there, is based exclusively on the VWAP indicator, although this is somewhat contrary to the logic of technical analysis. Nevertheless, the signals turn out to be quite accurate. The only drawback is that these signals are quite rare: they occur once a month on average, so this strategy is an additional one to your main strategies.

The vwap intraday strategy is based on the combination of two time frames: a longer one serves for preliminary analysis, and an intraday price timeframe is for entering/exiting trades within the day in order not to pay swaps. Currency pair here: [EURUSD][8]. The VWAP inputs: period 11, shift 0.

Entry conditions for a long/short trade:

  • D1 time frame: the current candlestick closes above/below the VWAP line after trend reversal. If it closes above, it is a preliminary signal to open a long trade; if it is below, open a short one.

  • Н1 time frame: the current candlestick closes above/below the VWAP indicator line after changing the trend direction.

You enter trades only once a day. If another signal appears within the day, it is ignored.

The stop-loss length is no more than 30 pips for 4-digit quotes or close to the level of the local extremum. Open a trade on the H1 timeframe at the next candlestick after the signal one.

The profit target level is 20-30 pips, after which the stop-loss is set to the breakeven level, 50% of the profit is then fixed, the rest of the trade is protected by a trailing stop loss (there is a risk of being disconnected from the Internet, during which time trailing does not work - use the [VPS rental service][9] instead).

There are false signals in this strategy but they are mostly caused by fundamental factors.

Example 1.

In the daily chart, there is the following picture. VWAP indicator was below the price for a long time - this indicates an uptrend. Then the price changed direction, but the white falling candlestick only touched the VWAP (green arrow); this is not a signal for two reasons:

The candlestick indicated by the yellow arrow is falling and when the trend reversed, it closed below the VWAP line. This event took place on 16 June 2020. Let’s switch to the H1 chart and look for a signal to open a short position on the next day - 17 June 2020.

A signal candlestick that crosses the VWAP and closes below the indicator line appears at 10 am. One could open a short position at the next candlestick, marked with a yellow arrow. The opening price would be 1.12666, the closing price of the trade with a 20-pip trailing stop loss would be 1.12447, and the profit would be 22 pips.

Example 2.

The previous example appeared on the daily timeframe in June. Let’s go back in history a month back to May where two opposite signals are visible. In the first case, an uptrend is visible, highlighted by a blue rectangle; after that, the trend reverses, and the signal candle (yellow arrow) closes below the VWAP line.

The candlestick appeared on 5 May 2020. Therefore, one would look for a signal to open a trade on the hourly timeframe of 6 May 2020. In the second case (green arrow), the rising candlestick closes after a trend reversal on 18 May 2020.

Entering a trade in the hourly time frame for the first case:

A position can be opened on any candlestick within the range indicated by the blue rectangle. The signal candle is the one that closed exactly at midnight, so a trade could be entered right on the next candle. You could wait for several successive falling candles for it to be a more reliable signal.

If you open a trade on the candle the arrow points to (a conservative strategy) and set a 20-pip trailing stop loss, the profit would be 20 pips. A vwap strategy with a higher level of risk involves opening a trade earlier.

Entering a trade in the hourly time frame for the second case:

Here the signal candlestick in the direction of price growth closed at the same level as the VWAP indicator. In theory, this is a weak signal and it would be worth waiting for the next candle closing above the VWAP line (yellow arrow), but trading is always a risk, which sometimes turns out to be justified.

Despite the fact that the VWAP indicator is more sensitive to price in comparison with moving averages, its disadvantage, like the MA, is a delay.

Like moving averages, VWAP is more of an auxiliary trend confirmation signal. It is rarely used independently and is not predictive. The tool is used exclusively in intraday analysis strategies. And although no one forbids you to use the VWAP on long timeframes, its signals will lose their accuracy.

Are you interested in free versions of the indicator? Test it on a demo account. If you don’t have one yet, you can do it in 2 minutes. Click on the “Register” button in the upper right corner of the broker’s website (on any page).

Go to MT4 from your Personal Account (you can learn more about the LiteForex account functions [here][10]), download, install the template in accordance with the instructions from the review, test the indicator and be sure to share your opinion about it in the comments!

VWAP vs. MVWAP

According to the VWAP definition, it is the volume-weighted average price. The MVWAP or Moving VWAP is the moving volume weight average price. The difference is in the averaging method.

There is no averaging in VWAP - the numerator is the price weighted by volume, and the denominator is the cumulative volume. The MVWAP is the average VWAP value. For example, if MVWAP has a period of 10, then the current indicator value will correspond to the arithmetic average of VWAP values for the last 10 candlesticks.

Some sources describe the difference between these indicators as follows. VWAP calculates the value for a fixed period - for a day, a week. This is indicated in the period settings: Daily, Weekly, etc.

For example, for a daily period, the indicator shows the weighted average price for the current day. And the next day, the Volume Weighted Average Price calculation will start over.

The MVWAP has a standard option for specifying the period in the settings. It is not tied to days or weeks and calculates the average over a specified number of candles, accumulating data over a specified period.

In theory, VWAP works better in intraday trading strategies in short time frames. MVWAP performs better in the timeframes starting from H4 and longer. In practice, everything depends solely on the trader’s experience, intuition, and ability to spot signals. Both MVWAP and VWAP can be adjusted to any timeframe.

One of the trading strategies involves the simultaneous use of VWAP and MVWAP. Signals can be intersections of both indicators with each other and/or price, the same direction of VWAP and MVWAP along with the price, signaling a trend, etc.

Anchored VWAP

The AVWAP or Anchored VWAP was developed by Brian Shannon, who described this tool in one of his books. Using the Anchored VWAP, you can calculate the indicator value for any period from the point which you click on with the mouse. From this point indicated on the chart, the average price value will be calculated, taking into account the volumes.

The key differences between VWAP and AVWAP (a simplified, free VWAP version is described):

  • The VWAP indicator calculates a weighted price value taking into account volumes for the period specified in the settings. For example, the period is 10, the indicator calculates the data for the last 10 candlesticks. Accordingly, after 10 candles from the moment the indicator was installed, the data is calculated based on the fully updated interval. The calculation period remains unchanged - the last 10 candles.

  • The AVWAP indicator calculates the weighted price value from the moment it is installed in the chart by clicking the mouse. With each new candlestick, the analyzed period increases.

  • AVWAP allows you to analyze the price trend from the moment of any fundamental event or strong market surge. In a trending market, it is not always possible to draw clear support or resistance levels since the price extremes are not located on the same line, and it is not clear which of them should be taken as the main points.

If you need to find the average price line taking into account the news factor, set AVWAP to a candlestick at the time of the news release and get the needed value.

Example. We need to analyze the price history since the Nonfarm payrolls report to see how long the market works out the news and how sharply the price chart changes. Let’s say that the event happened 10 candlesticks ago. The timeframe is not important in this case. The largest number of trades and the most significant volumes are during the first few candlesticks.

If we use the VWAP indicator with a fixed period, then, as new bars appear, the oldest candlesticks with the maximum volumes will be excluded from the calculation. After a few bars, we will receive data without taking into account the largest volumes at the time of the news release.

One of the ways out is to increase the Volume Weighted Average Price indicator period every few candlesticks so that trading volumes at the time of news release continue to be included in the calculation. Alternatively, you can use Anchored VWAP, which is tied to a specific reference point.

Limitations of Using VWAP

VWAP is not a price prediction indicator, as its values are based on price data from previous periods. Therefore, the indicator is used to confirm the already existing signal received from other tools. The limitations on trading with the VWAP are as follows:

  • You can’t use the VWAP to predict the trend direction. The indicator doesn’t search for the regularities in the previous periods.

  • The VWAP indicator performs well in the short- and medium-term timeframes, M5-H1.

  • The VWAP is a trend indicator for the medium-volatile markets. You’d better not enter a trade with this tool at the moment of news releases.

One of the significant problems with VWAP is the different versions of the indicator. If we compare the code, then different versions have only one similarity - the price of each bar is weighted, that is, multiplied by its volume. In all other respects, the indicator versions diverge.

In one case, the value is calculated for the period specified in the settings, taking into account the cumulative data. In another, the calculation takes place for the specified period (day/week), and with each new period, a new calculation starts. Accordingly, the data of these versions of indicators will differ.

Some of the solutions are:

  • Find out which version of VWAP you have installed. Understand how it works and what each setting parameter means. You can also buy a paid subscription to the developer for the entire package of indicators, including Volume Weighted Average Price, and get a detailed description for it.

  • Test the indicator without being tied to any specific strategy. For example, this overview describes strategies for the indicator, the link to the template of which is given at the beginning.

  • Consider the general principles of VWAP and develop your own vwap trading system based on them. Test it in the MT4 / MT5 tester.

Pros and Cons

I will sum up and describe the VWAP pros and cons in the table below:

Advantages

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Drawbacks

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1. It takes into account the transactions weighted back volume for each period of the interval. Therefore, it gives more accurate averaged price data at the current moment.

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1. It takes into account the volumes provided by the broker. But the broker does not always have the aggregated volume data for the entire market; therefore, its volumes may differ from real ones.

2. It is hardly affected by price noise, so you can use it in short- term timeframes, such as М1-М5-М15.

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2. The VWAP could be lagging. That is why it is used to analyze the previous period to confirm a trading signal.

3. It can be used to develop a high-frequency trading system based on prices and volumes.

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3. The indicator sensitivity to the recent periods is lower due to the large volume of the accumulated data.

4. It draws the boundaries of price channels more accurately in comparison with Bollinger Bands and some other channel indicators. Therefore, it is better suited for intraday channel trading strategies. It refers only to the full version of VWAP, where the standard square deviation lines are provided in the settings (Deviation).

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4. The full VWAP version is paid. The basic free VWAP forex version is a single line of weighted price. The full VWAP version consists of several lines according to timeframes.

VWAP trading indicator. Conclusions

VWAP is a useful signal confirmation tool, which is very similar to moving averages. But unlike MAs, it provides more reliable data on market volumes and the average market price. It complements trend indicators and oscillators quite well and is more sensitive to price/volume changes than moving averages.

The VWAP  will be an excellent assistant in deciding whether to enter or exit the market. If you still have questions or ideas on optimizing VWAP trading strategies, write in the comments!

In conclusion, I would like to write a few words about how else you can benefit from working with LiteForex:

  • LiteForex is an ECN broker that transfers trades directly to virtual ECN systems. This ensures a minimum spread, as well as the order execution speed up to 100 ms (the average market speed is 300-400 ms).

  • In addition to the usual platforms, LiteForex also offers its own very easy-to-use browser platform powered by MetaTrader with an integrated copy trading system. Read more about the benefits of social trading and working with the platform in the review “[How to make more money in the foreign exchange market: passive income for a successful investor][11].”

  • Psss! Now there’s a unique opportunity to get cool prizes (a house and a car among them) on the occasion of the 15th anniversary of the company. Read more about participating in the draw [here][12].

VWAP FAQ

How to set up VWAP on Thinkorswim?

Thinkorswim by TD Ameritrade is the result of a merger between the developers of a US stock trading platform and an American brokerage company. To configure the indicator, you need:

  • Enter your TOS profile. Click on the Studies / Edit Studies in the right corner of the menu.
  • Enter the indicator name, WVAP, in the search bar.
  • Specify the window in which the indicator will be installed - Price, Volume, Lower.
  • Specify the parameters Input, Day in the settings window.

Since this platform is designed to trade in the US stock market, you should pay attention to the VWAP for МТ4 and QUIK. You install the indicator on both platforms similarly. You need to add the indicator running file into the platform, specify the values of the time interval volume that will be taken into account in the formula, the period of chart update in seconds, shift in the settings.

How to read the vwap?

There are several ways to read the VWAP signals:

  • If the price has been above the VWAP line for a long time, it indicates bullishness, and the trend is up. If the price is clearly below the indicator line, the trend is down. However, this can also signal a soon trend reversal. One of the trading strategies suggests you open, for example, a short position when the price is above the VWAP and turning down, starting a bearish trend.
  • Volume Weighted Average Price is going down along with the price - this indicates that trading volumes are decreasing. Investors are not interested in the trading asset, it is uninspiring to oversell. So, the price could start trading flat soon. A decline in prices with consistently high transaction volumes may indicate a strong downtrend.
  • The steeper the slope of the indicator, the stronger the trend.
  • The price crosses VWAP several times in a short period of time, which means the average price corresponds to the current one. This is a sign of equality in the volumes of purchases and sales, which corresponds to a sideways trend.

Analyze the VWAP signals together with other technical indicators, price action patterns, or Ichimoku cloud.

How to calculate vwap on excel?

Upload the quotes from МТ4/МТ5 into Excel, having chosen the needed symbol and timeframe.

  • Change the formatting of the uploaded data using formulas to get prices and volumes in separate columns.
  • Calculate the average price. Use several options Typical, Median, Weighted.
  • Calculate the numerator of the fraction: multiply the average price by volume and stretch the cells.
  • Calculate VWAP for the required period: Add the calculated numerator and denominator for the period. Divide the resulting sum of the numerator by the resulting sum of the denominator.

You can download the template of the Excel spreadsheet

[via this link][4]

.

It is a trading strategy based on the VWAP indicator developed to optimize the risks and maximize profit. The trading system can be based on the channel’s construction using the Volume Weighted Average Price with different periods or deviation parameters.

Or the VWAP trading strategy means that you estimate the direction of the VWAP line movement and the location of the indicator above/below the price. In the first case, you can use intraday trading strategies based on price movement within the channel. In the second case, enter trades based on additional signals—for example, chart patterns and oscillators to define the overbought or oversold state.

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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  1. www.liteforex.com/blog/for-beginners/best-technical-indicators/moving-averages-ema-indicator/
  2. volfix.net/
  3. www.liteforex.com/blog/for-beginners/best-technical-indicators/bollinger-bands/
  4. drive.google.com/file/d/1zl93Ber3ROh4ZJSgrq4kwq4ibku6WGzF/view?usp=sharing
  5. drive.google.com/file/d/1JRZdhkmI_uN9jagFE3eJ_zTko39VZDNR/view
  6. drive.google.com/open?id=1l1K8vmbRfjrcDvhQljdJCJ6iMrEW05WW
  7. www.liteforex.com/downloads/mt5/
  8. my.liteforex.com/trading/chart?symbol=EURUSD
  9. www.liteforex.com/trading/additional-services/vps-services/
  10. www.liteforex.com/blog/for-beginners/lets-look-into-liteforexs-new-client-space/
  11. www.liteforex.com/blog/for-professionals/combined-strategies-to-make-money-on-forex/
  12. www.liteforex.com/contests/dream-draw/