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What is the VWAP Indicator? Meaning and Explanation
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VWAP Indicator Guide: What Does the VWAP Tell Us, and How to Use it?

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With a background in journalism and digital marketing, Marcel is a keen crypto enthusiast and investor. A regular contributor to several crypto publications, he believes that META-based projects will soar in the coming years and is super-bullish on MeritCircle and the increase in P2E gaming platforms. Marcel is also excited about AVAX and FTM as ETH-chain alternatives, and any projects with strong utility, transparency, experience, and community marketing.
By Marcel Deer
author
With a background in journalism and digital marketing, Marcel is a keen crypto enthusiast and investor. A regular contributor to several crypto publications, he believes that META-based projects will soar in the coming years and is super-bullish on MeritCircle and the increase in P2E gaming platforms. Marcel is also excited about AVAX and FTM as ETH-chain alternatives, and any projects with strong utility, transparency, experience, and community marketing.
on March 20, 2023 | 7 min
Updated on Jan 16, 2024
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Charles Archer
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Charles Archer is an experienced financial writer specialising in monetary law. With a background in stock market and private equity analysis, he’s worked for many years as a freelance investment author, and has had articles published in a wide range of regional and national titles, both online and in print. He holds a Master’s degree in Law from the University of Law, the UK’s largest legal training institution. Charles believes the key to successful investing lies in quality research, and aims to offer a unique viewpoint that investors cannot find elsewhere.
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VWAP is an acronym that stands for Volume-Weighted Average Price. It is a technical price indicator that helps traders determine whether an asset is overbought or oversold based on the volume of trades conducted at a certain price during a specified look-back period.

What does this mean? How can you use the VWAP indicator in crypto markets to help you make better trades?

In this article, I will walk you through how the VWAP indicator works, how to use it in your trading, and when are the right moments to deploy it for the most profitable results.

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What is the VWAP Indicator? Meaning and Explanation

The VWAP is a moving average of volume, which tells us a tradable instrument’s average price by volume over time. The VWAP is calculated by taking the average price of all trades during the day and then dividing that number by the total volume traded.

There are two popular versions of the VWAP indicator: MVWAP and VWAP.

The MVWAP (median volume-weighted average price) indicator (or “moving” version) considers any adjustments made for dividends paid out or splits. The classic VWAP does not make these adjustments so is more relevant for cryptocurrencies than its moving counterpart because it does not have to factor in these events that typically do not feature in crypto assets.

Crypto Average Price Calculator– How is VWAP Calculated?

The VWAP is calculated by taking the total value of all trades divided by the total volume of those trades.

VWAP = (Typical Price x Volume) / Cumulative Volume

This calculation compares the current instrument price against its average price over time. The VWAP measure indicates how liquid an asset is and if it provides liquidity to the market. This can help determine whether a crypto asset’s prices are stable or volatile.

How to Read the VWAP Indicator?

The trick to using VWAP correctly is knowing what timeframe works best for your strategy. In general, you want high volume on both sides of the trade so that you are not just looking at one side or another; you want both sides represented to get an accurate image of current market sentiment and directionality bias.

If the current price is above the VWAP, it could be an excellent time to sell. If the current price is below the VWAP, it could be an excellent time to buy. This is the typical way that the VWAP indicator is used, in simple terms.

In the Bitcoin price chart above, which took place during a long-term downward trend, note how the VWAP shows the strongest momentum in line with the trend when the VWAP lines are angled down, and the price action is taking place below the lower VWAP line. Note also that some of the best-selling opportunities came from reversals above the upper VWAP line.

How Does VWAP Work?

The VWAP indicator considers how many units of the instrument in question were bought and sold over the last minute or so and uses those numbers to help determine the market’s overall volume at any given moment. It also considers how much each unit (for example, 1 bitcoin) costs compared with its previous prices over time.

If, for example, there has been much buying activity at $50 per crypto coin asset and some selling activity at $50 per coin, the VWAP can be a way to tell that there are approximately equal amounts of buyers and sellers for $50 per coin unit price and adjust accordingly.

Does VWAP Work in Crypto?

As the crypto market continues to grow, more traders are working to find strategies to help them make money. Crypto assets trade on exchanges and traditional margin brokers that match buyers and sellers through an internal order book. Trades occur when a buyer bids for an order and a seller offers their price. The VWAP strategy works by following the path of least resistance in the order book, buying when there are many buyers at one price and selling when there are many sellers at another price.

Since the cryptocurrency market operates 24/7, indicators like VWAP can help determine accurate entry and exit points in shorter time frames. Therefore, they are used by crypto day traders for intraday trading, timing their entries and exits using these tools, as the VWAP indicator is seen to work quite well with crypto assets.

How to Best Use the VWAP Indicator to Trade Crypto?

There are many different ways to effectively use the VWAP indicator to trade crypto.

The VWAP indicator can potentially tell you when a crypto pair is overbought or oversold. You can use this to plan your trading strategy ahead of time.

Another effective way to use the VWAP indicator is as a trailing stop loss method for your trades.

Finally, the most used way to utilize the VWAP indicator is by using it as a guidepost when looking at buying or selling opportunities within any given cryptocurrency market. For example, you can look up historical data on each specific coin’s performance against its historical averages, compare those with other coins’ performance against theirs, and then decide when to buy or sell based on the current price above or below those averages.

You can also use this information as a measure of conviction to gauge how much of your risk capital should be invested in any given coin at any given time.

Technical Indicators to Use with Volume Weighted Average Price

Technical price indicators are an essential part of any trading strategy. The technical indicators you use on your chart can help you determine the best entry and exit points, but they cannot tell you what to do at any given moment. The best technical indicator is the one that ideally suggests to you what to do right now!

While VWAP can help indicate potential future movements, there are no guarantees of success using this method alone. Because of this, I recommend using other technical indicators and considering the general macro fundamentals of the crypto market alongside VWAP to help give you a more considered analysis of all the information available at the time of making a trade.

Here are a couple of technical indicators you can use effectively with VWAP:

  • Relative Strength Index (RSI): The RSI indicator measures a crypto asset’s momentum. It can help you determine whether it is overbought or oversold, which can help you decide if it is the right time to buy or sell.
  • Parabolic SAR: This is another trend-following indicator that looks at recent price movements and then compares them with historical price patterns. If the current movement falls outside these patterns, then the Parabolic SAR will stop you from entering trades.

Why is the Volume-Weighted Average Price Important?

The VWAP indicator is a critical metric in trading because it helps traders determine what the market thinks the natural value of a crypto asset is at any given time. It measures the average price of each trade over a period, factoring in the number of units traded and dividing by the total volume. This allows traders to get a sense of how the values of an asset vary on average, as opposed to just what individual trades were happening at certain times.

Traders use VWAPs to predict when they should buy or sell assets. For example, if the VWAP has been rising steadily for days, you might think there is more interest in the asset, which means it could rise even further due to strong momentum.

VWAP Pros and Cons

There are a lot of pros and cons to consider in using the VWAP indicator to trade crypto:

Pros

  • VWAP is a fantastic way to gauge market sentiment
  • VWAP can also be used to minimize your capital risk at a trade level
  • VWAP can also determine if an asset is likely to have significant support or resistance at a certain level

Cons

  • VWAP is a lagging indicator
  • VWAP is affected by trading volume
  • VWAP is not an accurate indicator for large orders

VWAP Vs. TWAP

VWAP stands for volume-weighted average price, while TWAP stands for time-weighted average price. Both are measures of the average price of an asset over a period, they just use different weighting methods to calculate the average. They both have advantages and disadvantages and can be useful in different situations.

The main difference between VWAP and TWAP is that VWAP looks at the total amount of volume in each transaction, while TWAP only looks at the amount of time in each transaction. So, if you have many more transactions taking place over a shorter period, then TWAP will be more accurate than VWAP, but if there are fewer transactions over a longer period, then VWAP will be considered more accurate than TWAP.

VWAP Vs. VWMA

The VWAP and VWMA (volume-weighted moving average) are two of the most popular technical price indicators traders use. Both indicators can determine future price direction, but they work slightly differently.

The main difference is that VWMA accepts changing prices as part of its calculation process; it uses them to calculate its averages. With VWAP, changing prices does not factor into its calculation process; only volume information and time are used to calculate its averages.

VWMA can be more useful when trying to track long-term trends. For example, suppose you are looking at historical data over a long time, like months or years. In that case, using VWMA instead of VWAP will give you more accurate results because outliers do not skew its results (for example, a very high or low price due to a spike caused by a market shock or large trade).

Bottom line

The VWAP indicator allows for more informed decisions when trading cryptocurrency.

The VWAP indicator can help you identify the best time to buy or sell crypto assets and whether to go long or short on a particular coin. The standard usage of the VWAP indicator is to assume that the price, especially within a long-term trend (which has historically been strong and reliable with major crypto assets such as Bitcoin and Ethereum), will revert to its VWAP price once it extends beyond it against the trend, or that if it is consistently running above or below the VWAP, this indicates a bullish (above) or bearish (below) intraday trend.

The VWAP indicator can also give you an idea of how volatile a market is, which may help you tweak the best overall trading strategy to use in these conditions.

FAQ

  • Is VWAP trading profitable?
    The simple answer is yes, using the VWAP indicator to trade crypto can be very profitable. However, it is important to remember that this is not a magical indicator that will help you win every trade; it is just another tool in your trading arsenal.
  • Is VWAP a good indicator for day trading?
    Yes, the VWAP indicator can be an excellent indicator for day trading crypto assets. VWAP can help you find the best time to buy or sell coins by showing when prices are high or low relative to their historical averages, which can give you a better idea of whether the market is overbought or oversold at any given time.
  • Does VWAP work?
    VWAP does not work 100% of the time, but it can give a good indication of when to buy or sell a crypto asset, especially within a long-term trend. It is also a good indicator for determining what trading strategy best suits market conditions.
  • What do the three lines on VWAP mean?
    The upper line is an overbought level, the lower line is an oversold level, and the VWAP price itself is the middle line. Both upper and lower lines plotted a specified number of standard deviations above the middle line.
  • What time frame should I use with VWAP?
    Crypto traders commonly use a 5-minute or 15-minute time frame with the VWAP indicator during active session times.
  • Which indicator works best with VWAP?
    VWAP works well with many technical indicators, most notably the Relative Strength Indicator (RSI) and the Parabolic SAR indicator.
  • Is VWAP intraday only?
    Yes, VWAP is calculated intraday and used to measure the quality of price fills or whether a crypto asset is considered good value at a particular price based on the day’s trading activity.
  • Where should you anchor VWAP?
    The best place to anchor VWAP is usually the first line used in the calculation.
  • When is VWAP bullish or bearish?
    When the price is below the VWAP, it is a bearish market. When the price is above VWAP, then it is bullish. However, if the price has moved against the long-term trend, it can be expected to revert to VWAP in the direction of the trend.
  • What is the most effective indicator for day trading?
    TVWAP is the most effective indicator for day trading because it measures volume and price.
  • Can you use VWAP on a daily chart?
    No, you cannot use VWAP on a daily chart, because it is not defined for daily, weekly, or monthly chart time frames.
author
About Marcel Deer
With a background in journalism and digital marketing, Marcel is a keen crypto enthusiast and investor. A regular contributor to several crypto publications, he believes that META-based projects will soar in the coming years and is super-bullish on MeritCircle and the increase in P2E gaming platforms. Marcel is also excited about AVAX and FTM as ETH-chain alternatives, and any projects with strong utility, transparency, experience, and community marketing.
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