What is VWAP?

VWAP, full name: Volume Weighted Average Price. The VWAP is a very different type of moving average compared to the moving averages used by Traders. Instead of calculating based on market price, VWAP is based on market transaction volume. Since the formula calculates based on daily trading volume, VWAP is very effective if applied to Day Trading.

Traditionally, the VWAP indicator is based on tick data (tick chart, different from the chart that uses the time that we often trade on mt4). With each asset class, on average, there will be a range of 20-30 ticks every 1 minute. Thus, if you trade in 1 day, the number of tick data can be up to 5000 ticks.

Above is a graph using the VWAP line but on the chart based on the traditional timeframe. There are five steps involved in the VWAP computation.

How is the VWAP calculated?

The VWAP is calculated in five steps.
  • First, one will average the highest, lowest, and close prices of each candle on the low timeframe.
  • Second, multiply that value by the current session volume.
  • Third, continue to accumulate those values until the end of the transaction day. (called cumulative number sequence).
  • Fourth, continue to accumulate the volume of transactions during the day (to calculate the trading volume of one trading day).
  • Fifth, divide the value from step 4 by the value of step 5 to get the value of the VWAP.
The VWAP formula can see below:

How does VWAP apply in trading?

Like other moving averages, the VWAP is a lagging indicator (with lagging in price). If the cycle you set for VWAP is larger, the higher the delay VWAP will be. VWAP has cycles that will help you trade accurately but have very slow entry points relative to price. But if using VWAP cycle is too short, it has inaccurate disadvantages.

This chart will compare you with 3 types of moving averages on the M1 frame in 1 day, including 390 cycle SMA (equivalent to 390 minutes of a daily session), VWAP cycle M1 and 150 periods SMA. Compare these 3 MAs because they are calculated on the sample as the sum of candles on the M1 frame. As you can see, the 390 period SMA deviates from the VWAP, because this type of SMA includes the previous session, unlike the VWAP which only counts the session of the day.

Due to its fairly standard price tag, VWAP is often used to identify trends for intraday charts. So for Day Traders who like to trade with the trend, using VWAP is quite effective. Brothers refer to two more types of market increases and sideways when using VWAP below.

VWAP also has another use of determining market liquidity, due to the interesting nature of using transaction volume. VWAP is very suitable for Traders in funds because they need large liquidity to trade the market (enough liquidity to execute orders). The idea here is very simple, if the price moves below the VWAP, the trader entering the buy order will have enough liquidity to match the order because most of the current trading volume belongs to the sell order. The reverse is also good for sell orders if the price moves above the VWAP.