What is VWAP?
VWAP (Volume-Weighted Average Price, from English "average price weighted by volume") is an indicator that is used by crypto traders. It is most often used for intraday transactions. VWAP is very similar to the moving average, but has a lot of smoothness. The indicator is calculated as the ratio of the product of cryptocurrency prices for the corresponding volume to the sum of volumes:
VWAP= ∑(Volume*Price)/∑Volume
In the above formula, Volume is "volume", Price is "price". As a rule, the so-called "typical price" is used for calculation, which is the arithmetic mean of the closing price, maximum and minimum of the trading session:
Typical price = (H + L + C)/3
Where H is the maximum of the trading session (High price), L is the minimum of the trading session (Low price), C is the closing Price.
In real trading, you don't have to count anything manually, as any trading and analytical platforms will do it all automatically. The indicator is recalculated every trading session, however, if necessary, you can set other parameters: week, month, year, and so on.
Trading with VWAP
In terms of its graphical execution, VWAP differs little from a simple moving average. Actually, that's why it can be interpreted in a similar way. A number of traders use the intersection of the VWAP price from the bottom up as a buy signal, and from the top down as a sell signal.
You can, however, do everything exactly the opposite. In other words, if the price is below VWAP, then you buy, hoping that your cryptocurrency is undervalued, and if it is higher, you sell, counting on its overvaluation.
The indicator is also used to identify areas with higher liquidity. But this is mainly done by institutional investors who have a lot of cash.
VWAP can be clearly observed in the figure below. The indicator line itself is shown in blue. The two green lines show the standard deviations from the average volume-weighted price.
Source: tradingview.com
Based on the figure, one more strategy can be distinguished — trading in the channel. In this case, its upper and lower boundaries will be the lines of standard deviations. If the price reaches or is higher than the first one, then it is worth selling. If it falls to the lower limit, then it is worth buying.
You can also encounter an indicator such as Anchored VWAP.
What is Anchored VWAP?
Anchored VWAP is the same VWAP, only set from a certain point in time. The visualization and interpretation of its signals are no different. For example, in the figure below you can observe Anchored VWAP on the bitcoin chart from the March historical high:
Source: tradingview.com
And this is what the Anchored VWAP looks like for the last two months (May-June 2024):
Source: tradingview.com
The point is that you can set the indicator from any point in the past. At the same time, this can be done on any timeframe. Below is an Anchored VWAP on a 15-minute chart starting at midnight on June 18, 2024:
Source: tradingview.com
In general, you can select the parameters of the indicator for yourself. The main thing is that it brings you profit, and whether it will be in the classical interpretation of signals or not is not important.
Advantages of VWAP
The advantages of VWAP include the following:
smoothing using volumes, which makes the averaging more accurate;
quite variable indicator settings, for example, you can use different approaches to calculating the price;
wide application in trading strategies: trading in the channel, using the indicator as support/resistance, using it in combination with other trading indicators;
you can build on any timeframe from any point in the past.
Disadvantages of VWAP
The disadvantages of the indicator are as follows:
it is impossible to make any forecasts based on it, it only gives a guideline on the market situation;
like moving averages, VWAP is lagging in nature;
The volume data on different exchanges will differ, so the picture in VWAP may also differ.;
It is mainly used for intraday trading, it is not suitable for investment;
it is not applicable as the only analytical tool.
Conclusion
Thus, VWAP is one of the indicators that can help for intraday trading. However, forecasts cannot be made based on it. VWAP is a fairly diverse tool that can be customized for yourself. It will be most effective in combination with other trading indicators.