Volume-weighted average price (VWAP) and moving average price (moving VWAP, or sometimes MVWAP) are a type of weighted average that includes volume in their calculations. It is plotted directly on the price chart.
VWAP is only an intraday trading indicator – it will not show up on a daily chart or a more extended time compression (e.g. weekly, monthly).
Example of VWAP applied to the S&P 500 . 5-minute chart
Prices hovering below VWAP could indicate that a security is cheap or cheap French on an intraday basis. Conversely, prices on VWAP may indicate that a security is expensive on an intraday basis.
VWAP is also used as a barometer for commercial filling. Volume is an important component related to the liquidity of a market. For example, if a long transaction is filled above the VWAP line, this can be considered a suboptimal transaction.
Moving VWAP tracks the end-of-day VWAP calculation over time, and thus essentially forms a moving average. Its timing can be adjusted to include as many or as few VWAP values as desired. Below is an image of the moving VWAP applied to the daily chart of the S&P 500 (pink line).
It should be noted that VWAP and VWAP migrations may not work across currencies/forex due to the fact that many software platforms do not account for volume data in this asset class.
Calculate VWAP
VWAP is calculated through the following steps:
1. For each period, calculate the typical price, which is the sum of the high, low, and close divided by three [(H + L + C) / 3]. One bar or candle equals a period. This time is set to be at the discretion of the trader (e.g. 5 minutes, 30 minutes, etc.).
2. Take the regular price (TP) and multiply it by the volume (V), giving the value TP * V.
3. Keep a running pivot table of TP*V totals as well as running volumes totals. This is additive and synthetic throughout the day.
4. VWAP is calculated by the formula: cumulative TP * V / cumulative volume
This calculation, when run over each period, generates a weighted average price for each data point. This information will be overlaid on the price chart and form a line, similar to the first image in this article.
VWAP migration simply adds various VWAP metrics at the end of the day and averages them over a number of user-specified time periods.
VWAP will be calculated automatically in one’s charting software. There should be no mathematical or numerical variables to adjust. On the moving VWAP indicator, one will need to set the desired amount of time.
Uses of VWAP and VWAP Migration
The VWAP, which is an intraday indicator, is best for short-term traders, whose trades typically last only a few minutes to a few hours.
As a long-term average, the VWAP move is more suitable for long-term traders making trades that span days, weeks, or months.
The VWAP move is a trend following the indicator and works in a similar way to the moving average or the average proxy move, such as a linear regression move. For those who use trend following as the foundation of their trading strategy, a VWAP migration can be a viable indicator to integrate into one’s system.
Price reversal traders can also use VWAP moves. In such cases, we recommend a crossover strategy. The basic idea in crossover strategies is to use the “fast” average to gauge the trend direction when it crosses the “slow” average.
To find price reversals in a timely manner, shorter time periods for these averages should be used. For example, your fast moving VWAP line can be set to 1-3 stages while slow moving VWAP line can be set to around 5-10 stages.
This ensures that price reacts quickly enough to diagnose a change in trend early before most of the move has passed and left a non-optimal entry point. How to approach this will be covered in the section below.
Transaction example
As mentioned above, there are two basic ways to approach trading with VWAP – trend trading or price reversals. We will start with trend trading to get started.
Trend after trading example
Like any indicator, using it as the sole basis for trading is not recommended. One cannot simply follow the slope of one type of moving average and hope to drop the odds enough in one’s favor. Trend following is the basis of the most popular strategy in trading, but it still needs to be applied appropriately. This could mean taking signals from price action, chart patterns, other technical indicators, and/or fundamental analysis.
This post is dedicated to technical analysis, so we will use the VWAP move in the context of another similar-themed indicator. We will use the derivative oscillator , which runs between bullish and bearish periods when it is above and below zero, respectively.
Our trading rules will be simple:
Long transaction
- Moving VWAP needs to be ramped actively
- Aerial Derivative Oscillator
Short trade
- Moving VWAP needs to be negative slope
- Derivative oscillator below 0
Exit trading
- Either of these criteria is disabled
Example 1
Let’s see an example using a VWAP move on the S&P500 daily timeframe.
Since the VWAP moving line has a positive slope throughout, we favor long trades only. They appear when the derivative oscillator goes above 0 and are closed when it runs below 0. Trades are marked with Buy Buy zones between the white vertical lines.
This produces four decent size winners and one small loser.
Example #2
Here, we apply this basic system to an ETF that tracks the coffee futures market (symbol NYSEARCA:JO ).
We have one long trade and four short trades.
This has a more mixed performance, producing one winner, one loser, and three people almost breaking even.
Price reversal trading example
Price reversal trades will be completed using the VWAP crossover strategy. The longer the period, the old data will be wrapped in the indicator. We want to minimize this to catch reversals as soon as possible, so we want to shorten the time.
We want the intervals to be short, but not so short that we end up with something very confusing and send out some false or ambiguous signals. In the case of a VWAP migration, we can lower the time of the rapid line on the way down to 1, if necessary.
Our slow line can be as short as 5 hours. To get an indication of when the price might be stretched, we can pair it with another price reversal indicator, such as an envelope channel. This indicator, as explained in more depth in this article , diagnoses when the price could be stretched. To keep the signal as accurate as possible, we will use a tighter period (10) and use a standard deviation of 5. It is not common in price to breach the upper or lower band with the setting. This rigor should theoretically improve reliability.
So to lay out our rules for this system:
Long transaction
- Fast line (1 period) overtakes slow road (5 times)
- Recent contact of the bottom band
Short trade
- The fast road crosses the slow road
- Recent contact of the top band
Exit trading
- Subsequent crossover of moving VWAP lines to confirm previous trend
Example
Let’s apply this to the daily chart of the crude oil market.
In the chart below, just before the first trade setup, we see an explosion of momentum that causes the price to move up against the top band of the envelope channel. When the moving VWAP lines cross to indicate a bearish pattern, a short trade setup will appear at this point (red arrow). This causes us to drop to around 2%-3% before the VWAP lineup moves rapidly back and forth to confirm the trend. This leads to a trade exit (white arrow).
Later we see the same situation. Price moves up and runs through the top band of the envelope channel. On each of the next two candles it touched the channel again but both rejected the level. When the fast moving VWAP line crosses the slow line, this is a signal to take another short line against the trend (red arrow). The lines again cross five candles after the trade has exited (white arrow). If trades are opened and closed on the opening and closing of each candle, the trade will be close to breakeven.
VWAP transaction
VWAP is calculated intraday only and is mainly used in the market to check the quality of the fill price or whether a security is a good value based on the daily timeframe. If the price is lower than VWAP, it can be considered a good price to buy. When the price is higher than the VWAP, it can be considered a good price to sell.
If we look at this example of a 5-minute chart on Apple (AAPL), the price below the VWAP suggests that Apple could be reasonably valued (or a long trade with one of these prices is quality).
Likewise, when price runs on VWAP, it can inform a trader that Apple is expensive on an intraday basis. If he or she is planning to go long/buy the stock with a plan to only hold it on a short-term basis, it may be best to wait.
Obviously, VWAP is not an intraday indicator that should be traded on its own. But it is a tool that can be included in a set of indicators to help better inform trading decisions.
Conclusion
VWAP is calculated throughout the trading day and can be useful to determine if an asset is cheap or expensive on an intraday basis. Traders can check the VWAP at the end of the day to determine the quality of execution if they take that particular security position. If their fill price is lower than VWAP, this will be considered a plus (if the trade is a long/long position). If the price is above VWAP, this will be considered negative.
VWAP starts again every trading day.
VWAP move is a trend following indicator. It combines the VWAP of a number of different dates and can be customized to suit a particular trader’s needs. Long-term moving VWAPs are often used by long-term traders to track multi-month or multi-year trends. It can reduce the noise in the market for traders who are more interested in long-term trends or cyclicalities that may exist in certain markets rather than focusing on row movements. day.
Price reversal traders can use the cross of the VWAP move to identify turning points in the market. Therefore, the VWAP move is very flexible and very similar to the concept of moving averages.