VWAP Trading: How To Trade With The VWAP Indicator?
Key Questions Answered
What is VWAP?
VWAP (Volume-Weighted Average Price) is a trading indicator that calculates the daily average price for Bitcoin (BTC) and other cryptos. VWAP resets on the daily and helps traders buy below the average price and sell above the average price. VWAP is one of the most effective day trading indicators.
The daily average price is calculated by adding up the dollars traded for every transaction that day (volume) and dividing by the total number of units traded. For example, if Bitcoin is trading at $42,000 and the price fluctuated between $41,000 and $43,000 – the VWAP value will amount to $42,000 for the day.
- The Volume Weighted Average Price, or VWAP, gives us the average price that Bitcoin or altcoins have traded for the day.
- VWAP can be used for swing trading to buy when the price is below the VWAP value and sell when the price is above the VWAP value.
- Traders can open longs/shorts based on the average price. If the price is above the daily average, longs are recommended and vice versa.
- The indicator can be combined with other indicators such as MA (moving average) and trend.
- The VWAP indicator is most commonly used on the daily chart for short-term day trading, but can also be applied for long-term trading strategies using the monthly chart.
How To Trade With The VWAP Indicator
The VWAP calculation formula is the following:
VWAP (average daily price) is the result of the current price multiplied by volume and then split by volume. As the price of crypto is always fluid, the VWAP value changes in real-time. One minute it can be $41,100 and another minute it could be $41,150.
What Is VWAP Used For?
VWAP is mostly used in the stock markets to determine buy/sell areas but it was recently adopted in the crypto markets. In the stock market, the trading closes at a certain period and the indicator is reset each morning – giving a new value based on the formula.
The crypto industry is different because trading goes on 24/7 and the indicator resets after the new daily candle starts. On Phemex, the VWAP indicator resets every night at midnight (00:00) UTC time. Users can hover over daily candles and check what the previous VWAP values amounted to.
Trading VWAP in The Traditional Markets
In the traditional markets, both traders and portfolio managers will use VWAP to essentially determine where fair value has been established throughout a trading period. Think of this as an indication of where on average the most business had been transacted, and therefore where the most risk was put on.
How To Use The VWAP Indicator on Phemex?
The VWAP indicator is available for all trading pairs. To activate the indicator, navigate to a trading pair such as BTC/USDT:
The BTC/USDT chart on Phemex with the current price.
Make sure the chart is set to “D” in the top-left for effective VWAP trading. Press on “Indicators” at the top and search for VWAP:
Search for hundreds of indicators on Phemex easily.
Left click on “VWAP” and the indicator will automatically load as a single value in the top-left, showing the average price for Bitcoin on the day:
The VWAP indicator is loaded on the top-left.
Below “BTC/USDT” at the top-left, we can see the VWAP price is $41,095. The current price of Bitcoin is $42,084 which is about $1,000 higher than the Bitcoin VWAP price.
This indicates that the market value of Bitcoin is above the VWAP average and it’s a good time to sell for short-term swing trading and a good long opportunity for a mid-short term trade. A trader could open a long or sell their position at this point.
If we mouse-over the previous day candle when Bitcoin was trading below $40,000, we can see the average VWAP value will change:
Hovering over any candle shows historic VWAP values.
The average price yesterday was $38,633 and today the average price is $41,095 – representing an increase of 8.7%.
The VWAP settings for day trading can be adjusted easily. All you need to do is hover over the “VWAP” sign on the chart and press “Settings”:
Settings allow traders to adjust indicator preferences.
This option will allow us to place a line above the Bitcoin candles that show how the average price was oscillating throughout the day:
The VWAP indicator line on top of the Bitcoin candles.
Notice the blue line that stretches across the candles in this chart. The VWAP indicator line cuts right through the middle of the candles, showing the exact average for each day.
If you look back on the previous days, the best time to buy for day trading was below that average and the best time to sell was above the average. If we are in a VWAP breakout, the current market price will be higher than the VWAP price.
For long-term traders
If building a larger longer-term position, a portfolio manager might rely on the VWAP to identify where they can get involved in an area of high liquidity. This allows them to have a minimal market impact.
They can also use daily VWAP as a reference point for times when the price might fall well below “market value”, and offer what might be deemed as a discount.
For short-term traders: VWAP & Bollinger Bands
VWAP trading can be combined with external indicators. Many traders use VWAP alongside deviation bands similar to Bollinger Bands is used. In a mean-reverting environment, when the price gets extended from “fair value”, we often see a reversal to the mean price.
This gives traders short opportunities when there’s a rejection at the upper outer SD bands, or long bounces off the lower outer SD bands.
Bollinger Bands combined with the VWAP indicator.
Depending on the individual’s system, some traders may take longs when there’s a VWAP bounce on the top side and target one of the upper outer SD bands; or the inverse by shorting if price falls below the VWAP, with targets of the outer lower SD bands.
VWAP EMA Crossover Strategy: How To Use It?
EMA (Exponential Moving Average) is a weighted moving average indicator, similar to VWAP. When there is a “cross” on the EMA indicator, there is usually a big price move to the upside or the downside.
The EMA indicator is available on Phemex and can be combined with the VWAP indicator. This is the current daily Bitcoin chart with VWAP and “EMA Cross” indicators activated simultaneously:
Blue crosses on the EMA cross indicator with VWAP.
The EMA Cross is marked with little blue crosses on the chart. This is when different daily and weekly moving averages cross. If there is an EMA cross on the daily, and the market price is higher than the VWAP price – this is a long opportunity and vice versa.
During the last EMA cross that occurred recently, Bitcoin made a move to the downside. However, bear in mind that there is no guarantee there will be major price action every time the EMA crosses.
Anchored VWAP vs VWAP: What Is The Difference?
Anchored VWAP is an optional trading indicator. It is based on the same formula as the VWAP indicator and outputs the same daily values. However, the main difference between Anchored VWAP vs VWAP is that traders can add custom settings for the timeframe.
The regular VWAP indicator can only show daily or hourly averages. If a trader wants to see the average price between 01:00 yesterday until 14:00 today, they can input custom time settings using anchored VWAP and get the results.
Phemex does not offer anchored VWAP at the moment, but the workaround is to use the VWMA indicator or change the chart according to your time preferences. For example, if you want to calculate the average for the last 6 hours you could switch to the “6H” chart and the VWAP value would adjust instantly.
VWAP vs VWMA: Which Is Better?
The VWMA indicator is an alternative indicator to the VWAP indicator. The main difference is that the VWAP indicator resets values daily and the VWMA indicator takes the average price of the last 20 days to draw a moving average line.
The VWMA indicator is also available on Phemex and can be used in conjunction with the VWAP indicator:
The dark blue line is the VWMA indicator showing the average price for the last 20 days and the light blue line is the average price for each day. Buying opportunities can be identified below the VWMA line and selling opportunities above it.
What are The Best Ways To Use VWAP?
One of the best ways we can use VWAP though is not only to identify where most of the risk had been put on but from this, who might currently be in control as a result.
If we are using something like the 20 period daily moving average, the standard default setting is entirely based on candle closes and tells us nothing of the actual trading activity and participation that took place.
By using a VWAP we get an actual picture of where most of the volume was transacted over the course of a trend. If over the course of a week we know where the VWAP is, we can begin to make assumptions about who is in control depending on where we sit in relation to this VWAP.
If most of the trading was transacted at 9000 for the week, and we are currently trading at 9200, then we might correctly assume that longs are in a better position than shorts. As a result of this control, it might be a better idea to therefore look for longs in order to go with the current dominant flows. On the flip side, if the price begins to trade back below the 9000 VWAP, then most of those longs would be in pain and set up for a long squeeze as they looked to close out.
An example of a shift in control can be seen in the image below, where VWAP will act as dynamic support and resistance. Price had spent 1-week trading below 7-Day VWAP before claiming the upside. Upon taking over this level shorts that were positioned poorly were off-side. This often presents short term trading opportunities that can position themselves in advance of a squeeze. In this case, longs would have been welcomed upon signs of strength above VWAP once we crossed and held.
This tool does not need to be overthought. For many crypto traders is it part of how they define their current default bias.
TWAP vs VWAP
VWAP is also great when combined with other “Weighted Average Price” indicators from the same category. For instance, TWAP is similar but it calculates the weight average price over time. The difference in TWAP vs VWAP is that VWAP uses volume and TWAP accounts for time.
The VWAP indicator is a simple tool and does not need to be overthought. For many crypto traders, is it part of how they define their current default bias.
- If the price is trading above VWAP I will prioritize looking for longs
- If the price is trading below VWAP I will prioritize looking for shorts
VWAP uses a simple formula to tell us the average price for any timeframe (1M, 1W, 1D, 6H, etc) on a crypto chart. The advantage is that this is calculated in real-time, helping us make trades based on intuition. If the price is trading above the average, traders can look for selling opportunities or longs for a longer trade.
Experiment with this indicator on any of the spot markets or futures markets on Phemex. This can be an invaluable tool to use, for all types of market players. It’s ideal for short-term trading and placing careful long-term trades in conjunction with other indicators.
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