VWAP explanation, description and usage examples.Hello Traders:)
Enjoy this small tutorial about VWAP
1. Definition:
VWAP is a popular technical indicator used in trading to assess the average price at which a security has traded throughout the required time range, weighted by the volume of each trade. It provides a reference point for traders to evaluate whether they are buying or selling at a favorable price relative to the average market price.
2. Using VWAP:
- Trading Decisions: Traders use VWAP as a benchmark to make informed trading decisions. They may aim to buy when the current price is below VWAP, indicating a potential value opportunity, and sell when the price is above VWAP, suggesting potential overvaluation.
- Order Execution: VWAP can help traders with large orders execute trades efficiently. By splitting the order into smaller portions and executing them at intervals close to the VWAP, traders can minimize market impact and obtain more favorable prices.
- Identifying Trend Strength: VWAP can be used in combination with other technical indicators to assess the strength of price trends. When the price consistently stays above VWAP and VWAP slopes upward, it suggests a strong bullish trend, and vice versa for a bearish trend.
3. Different Types of VWAP and their purpose:
- Intraday VWAP: This calculates the VWAP over a single trading session, typically from market open to close.
- Rolling VWAP: It calculates the VWAP over a specified rolling time period, such as the past 20 days, providing a longer-term average.
- Volume Profile VWAP: It calculates the VWAP for specific price levels within a range, giving insights into the distribution of volume at different price levels.
- Additional option available on TradingView: Fixed Range Volume Profile. We can set the VWAP from literally any time and select only part of the intraday session. Useful, for example, to track your VWAP trade from the start of our trade. This allows us to determine the strength of the trend during our open trade.
4. Settings for Different Purposes:
- Timeframe: Traders can choose different timeframes for VWAP calculations based on their trading strategies. Shorter timeframes (e.g., 5-minute or 15-minute) provide a more granular view of intraday trading, while longer timeframes (e.g., 1-hour or daily) capture broader trends.
- Volume Weighting: Traders may consider using different volume types, such as total volume, buy volume, or sell volume, depending on their specific objectives and the information they want to incorporate into the VWAP calculation.
5. Visual Possibilities:
VWAP can be plotted on trading platforms as a line or a ribbon overlaying the price chart. It is often displayed alongside other indicators, such as moving averages or Bollinger Bands, to provide additional context and facilitate analysis.
6. Additional Ranges of VWAP:
- Standard Deviation Bands: Traders may add standard deviation bands around the VWAP line to identify potential overbought or oversold conditions. These bands help highlight when the price is deviating significantly from the average and can signal potential reversals or mean reversion.
- Multiple Timeframe VWAP: Traders may plot VWAP calculations for different timeframes on the same chart to gain insights into intraday and longer-term trends simultaneously. This allows for a comprehensive view of price dynamics across different time horizons.
Remember to adjust the settings and interpret VWAP in the context of specific trading strategies, market conditions, and the characteristics of the securities being traded. Additionally, it's recommended to backtest and validate any trading strategy before applying it in live trading.
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At the end example of how I am using VWAP with Heikin Ashi on BTC:
