What is the Volume-Weighted Average Price(VWAP)?

Aftering understanding the basic knowledge of K-line and common technical indicators such as moving average, MACD, and Bollinger bands, it is necessary to learn about some auxiliary indicators to make a comprehensive judgment. VWAP is an indispensable technical indicator, especially for some intraday transactions.

Basic Information of VWAP Indicator

The volume-weighted average price (VWAP) indicator can show the average price of an asset that is weighted by its volume in a certain period of time.

The basic calculating formula is as follows:

VWAP = ∑ (Typical Price * Volume) / ∑ Volume

Typical Price = (Highest Price + Lowest Price + Closing Price) / 3

VWAP is usually used as a reference indicator in intraday trading. Its value will be reset at the opening of every day. Generally, a 1-minute and 5-minute K-line chart is used. Taking the 5-minute K-line chart as an example. We can calculate the VWAP of a certain currency at 2030 as follows:

First, calculate the typical price for the first 5 minutes of the K-line chart.

Typical Price(p1) = (Highest Price + Lowest Price + Closing Price) / 3

Using the same formula, we can get the rest of the typical price. Suppose that they are p1, p2, p3, p4, p5, p6, p7, and the trading volume is v1, v2, v3, v4, v5, v6, v7. Then, the VWAP during this period can be calculated according to the following formula:

We can see that the calculation method of VWAP is similar to that of the moving average index, which also reflects the average price relative to the trading volume. On the chart, price, trading volume, and time are the most intuitive information that investors can obtain. VWAP focuses on the relationship between price and trading volume. It is often said in the trading field that novices look at prices and veterans look at volume. Therefore, VWAP is a handy reference indicator for intraday trading.

How to set the VWAP indicator on a trading platform

Let’s take Gate.io as an example. Go to Gate.io’s official website first. After you enter the “Trade” page, select the professional version. Then, click the “Technical Indicator” icon above the K-line chart. Enter “VWAP” in the pop-up box to find the indicator, click to select and it will display in the main image. On the blew chart, the VWAP ratio displays in the form of a line. That’s why it is also likened to a moving average.

(Source: Gate.io)

How to use the VWAP indicator

When the price is above the VWAP line, the market is in an uptrend, and when the price is below the VWAP line, the market is in a downtrend.

How to use the indicator in a bullish market

If the k-line crosses VWAP from bottom to top, or the pullback does not break the support of VWAP, it can be regarded as a bullish signal, and the price may further rise.

As shown in point 1 below, the price breaks through the resistance of VWAP at around $23000 from bottom to top, forming a bullish signal, and then it rises to around $24200, achieving a thousand increase.

（Source: Gate.io)

At point 2 below, the price of BTC first retreated from $23250 to around $23150, where it was supported by VWAP, forming a bullish signal, and then it rose to around $23500.

（Source: Gate.io)

How to use the indicator in a bearish market

If the k-line goes from top to bottom and crosses VWAP, or the rebound does not break through the resistance of VWAP, it is regarded as a short signal, and the price may fall further. As shown in point 3 below, the price of BTC fell below the support of VWAP at around $23950, forming a short signal, and it further fell to around $23750. At point 4 below, the price rebounded from $23750 but did not break through the resistance of VWAP at $23900, forming a short signal, and the price further fell to around $23450.

（Source: Gate.io)

Disadvantages of VWAP

VWAP is not suitable for a volatile market. When the currency price fluctuates around the VWAP line, it is easy to break through VWAP and then fall below the support of the line, and then quickly pull back after breaking through the support of VWAP, forming a false signal and causing frequent stop losses.

Moreover, the calculation formula of VWAP tells us that the VWAP calculates the previous price and trading volume, unable to predict the future trend, which has a hysteresis. As a cumulative indicator, VWAP will increase continuously over time. Therefore, the longer the period, the more serious the hysteresis effect. For example, the VWAP indicator of a week is far less sensitive than a 5-minute one.

Conclusion

The VWAP indicator is simple and easy to understand, and can well reflect the relationship between trading volume and price, indicating how strong the current price is. It is especially suitable for intraday trading and is a good auxiliary indicator for investors to make investment decisions.

Institutions can use this indicator to conduct large transactions to better control costs. Similar to the EMA line, users who use this indicator can make investment decisions based on the relative relationship between the K-line and the VWAP indicator.

Certainly, each indicator has its pros and cons. What’s crucial is to master its applicability and properly use it as a basis for our investment decisions. All in all, there is no universal indicator in the market. Only by learning and practicing can we achieve better profits.