Crypto trading can be a very profitable stream of income. However, you need to understand how to use technical indicators to make trading decisions. Pro traders are more profitable than amateur traders because they have mastered technical and fundamental analysis. One of the essential indicators crypto traders use to interpret a crypto chart is the VWAP indicator.
VWAP stands for volume-weighted-average-price and is used to measure the performance of an asset. The VWAP indicator measures how well a cryptocurrency is doing compared to a benchmark figure. This comparison will help you decide whether to sell or buy a coin. In this article, you'll learn how VWAP works, its limitations, how to use VWAP indicator, and how to navigate VWAP indicator settings for better trade analysis.
How VWAP Works?
Calculation of VWAP
You can find the VWAP indicator values directly for the crypto chart, but if you'd like to calculate it yourself, here are the steps involved.
- On a five-minute chart, find the average price the coin traded in the first five minutes of the day.
- Find the highest, lowest, and closing figures and divide by three to get an average.
- Multiply the average by the trading volume for that period. This will give the VWAP.
The formula to calculate the VWAP is as follows;
VWAP= (HIGH + LOW + CLOSE/3) / VOLUME
Interpretation of VWAP values
After learning the VWAP indicator meaning, you should also learn how to use VWAP indicator in day trading. The indicator appears as a line on the crypto chart.
When the crypto coin's price is above the line, it means the crypto coin is in an uptrend, and when the price falls below the line, it means the crypto token is in a downtrend.
At the end of the day's trading, if you bought a crypto coin below the VWAP line, it means you purchased it at a good price, but if you bought it above the VWAP line, it means you may have overpaid for it.
Limitations of VWAP
The VWAP indicator strategy is based on past price action and does not predict the future. Here are some ways in which the VWAP indicator is limited.
- The VWAP indicator is single-day and cannot be used over many days.
- The VWAP indicator cannot be used in isolation from other technical indicators when making a trading decision.
- Traders can miss buying opportunities if they're waiting for the price of a coin to fall below the VWAP line in a scenario where a coin is in a continuous uptrend.
- VWAP does not have predictive elements as it is based on historical values.
Situations when VWAP is not useful
VWAP is not helpful in a highly volatile market with frequent price rises and falls. The indicator tends to average the effects of sudden price changes and can be ineffective and inaccurate for trading analysis.
Other indicators that can complement VWAP
You can use VWAP in conjunction with moving averages to confirm trend directions. If the VWAP is higher than the 50-day moving average, it validates a bullish trend; otherwise, it proves a bearish trend.
Finally, what is VWAP indicator used for in a multi-indicator trade analysis? It's majorly used to gain information on-trend patterns and buying & selling pressures.
VWAP vs Other Volume-Based Indicators
As you explore how to read VWAP indicator, you'll notice that other indicators give measures of uptrends and downtrends. So, how does VWAP compare to other indicators like the Simple Moving Average (SMA)?
Although VWAP and SMA may look similar on a crypto chart, they present different results.
- VWAP is calculated by multiplying three selected prices by volume and dividing by three to get the average.
- SMA incorporates only price; it's obtained by totalling the closing prices over a certain period and dividing the sum by the number of days.
When you study a VWAP indicator Tradingview chart, you can gather insights to help you make trading decisions. Insights from the VWAP trend line can help you identify strategic points for;
- With pointers to trend confirmations.
- Identifying breakouts.
- Finding support and resistance levels.
Best Practices for Using VWAP
Is VWAP a good indicator to incorporate into trading strategies? The following tips answer the question affirmatively and expound on how to use the VWAP indicator formula in your trading.
- When the price exceeds the VWAP.
When the price of a coin is above the VWAP, it indicates a bullish trend. Once a retracement occurs, check if the trading volume is above average; if yes, it confirms a positive trend. Buy at the retracement level in the direction of the trend.
- When the price falls below the VWAP.
When a coin's price is below VWAP, it signals a bearish trend. Wait for a retracement and confirm that the trading volume is above average. This establishes a negative trend and provides an opportunity for you to sell at the retracement level in the direction of the trend.
- VWAP indicator as support/resistance.
When a coin is in a bearish trend, the price takes support at the VWAP. The VWAP acts as a resistance level, and the price fails to exceed the VWAP. Sell at the resistance level in the direction of the trend.
Revolutionize Your Trading with VWAP Indicator
The VWAP indicator incorporates volume and price to provide insights into the price direction of a coin. The limitations to using the VWAP indicator lie in the fact that it doesn't provide accurate data in a highly volatile market and must be used in conjunction with other indicators.
The best indicator with VWAP is the small moving average. You can use the VWAP indicator to find support, resistance levels, and points to buy or sell cryptocurrency. If you've never tried the VWAP indicator for trading analysis, try using it in demo trades to see how to trade with VWAP indicator in actual trades. You can also use miner hosting to make money passively from Bitcoin mining.