Crypto Trading with the VWAP Indicator Ultimate Guide
Learn How to Trade Using the VWAP Indicator so that you can profit from this crypto trading signal. The Volume-Weighted Average Price Indicator Explained.
The crypto market is constantly in motion, making it difficult to know when to buy or sell. In the space of technical analysis, there is an endless variety of technical strategies and indicators.
Fortunately, there are tools like the VWAP indicator that help traders identify these opportune times. Since the crypto market started, traders have been looking for ways to take advantage of these opportunities.
The Volume Weighted Average Price (VWAP) is a technical analysis tool that day traders and intraday traders use to spot entry points and exit in their short-term trades. VWAP can help you time your trades in the crypto markets by letting you know when an oversold or overbought trend is suspected. Its accuracy makes it the perfect tool for this purpose.
Day trading in the cryptocurrency market can be unpredictable. You can measure the progress of the market with the VWAP indicator. Its accuracy makes it the perfect tool for this purpose. The last thing you want is to miss an opportunity because you were sleeping.
There are many indicators that it is often difficult to know the difference between them. Many are variations of the same theme that use the same input parameters and produce similar results.
Before deciding on a trading strategy, it is essential to analyze the technical indicators available and determine what they do. Then choose the unique ones that combine well with other crypto trading indicators and, above all, offer you a trading advantage.
VWAP, or Volume Weighted Average Price, is an excellent technical indicator because it considers price and volume. Unlike moving averages, VWAP weighs more heavily on points with larger trading volumes. The VWAP indicator provides crypto traders with valuable information on entry and exit points and the relative strength of the underlying asset.
The VWAP is not a crypto trading indicator used by the Gunbot core; instead, it is a passive trading tool for investors to accumulate coins at a perceived low-cost price. But, you can use it to manually buy a cryptocurrency cheaply and let the crypto bot handle the sale on automatic for a higher price.
More about automation later. For now, let’s find out why the VWAP indicator is a crucial component of many trading strategies. Here we shall be exploring one of the critical adopted technical analyses commonly used in cryptocurrency trading.
What is the VWAP Indicator?
VWAP (volume-weighted average price) is, in simple terms, the average cost of a coin over an average period, weighted by the number of assets traded over a specific time. Many traders use the VWAP indicator as an essential benchmark for the overall order flow throughout the trading session.
For big-sized account traders, they use the VWAP to assess where the best possible entry price might be, for example, if your entry is lower or higher than the VWAP at the moment.
If you buy an asset that says you are entering the market below the VWAP for the best possible results. Because many believe that if you buy this asset, you will buy it with volume.
The VWAP is also that strategy that shows how volume is pouring into the market daily. One way to use this knowledge is to determine what type of market you are trading in; Is it a trendy market or the other way round? Once you have a reply to this, use the full potential of the VWAP indicator.
In a non-trending market, you may want to consider fading or buying/selling if the price moves away from the VWAP. Whereas if the market is trending, you should consider buying the lows and selling the highs on the VWAP. Let’s explore more on this.
There are many practical and less stressful techniques to using Volume Weighted Average Price. Most times, You can use the VWAP indicator to establish a bias in the direction of the trade. Other times you can follow the market price against its high-low position throughout the day.
On a day of large upward and downward fluctuations, it can be difficult to orient yourself to your position on the futures chart; you want something that reflects a neutral position.
This particular indicator performs a little better than the moving average, but that still doesn’t stop it from falling.
It’s always satisfying to set a normative value for the sum that combines volume and price movement. It’s like having a GPS in a vast forest; at least you know the spot where you started the day and can quickly come back to that spot.
Some traders seem to lose track of their positioning on any given day, making it challenging to define trends or bracketing parameters.
What does the VWAP indicator tell traders?
VAWP indicator is a great signal to filter information from other technical analysis tools.
For example, a trend in a MACD or a Stochastic may indicate strength or weakness in the current price movement. Still, when these indicators are combined with the volume indicator, the trend may be confirmed or contradicted.
We will say more about volume analysis; this includes the tools, methodology, and guide to help you set up a profitable trading strategy.
Volume analysis indicators are great tools that support the technical analysis of other indicators. You should also know how the price trend is motivated to confirm the strength of their trading position and make changes if necessary.
We know that the VWAP indicator is a tool that buyers use to find suitable entry and exit points. When crypto traders need to dump a prominent position, they want to sell at the VWAP or higher.
Professional traders regularly use several intraday VWAP strategies to answer three key questions:
- What is the current average price?
- What was the price at my desired entry point?
- What is the average price over the last X hours?
Application of the VWAP Indicator
Using the VWAP indicator as a crypto trading benchmark
Understanding volume-weighted averaged price is vital for successful crypto trading. We often hear the comment, “the increase in volume when prices go up is bullish, and the increase in volume when prices fall is bearish.”
That’s probably all we can hear when people talk about trading cryptocurrencies with the VWAP indicator.
A good understanding and application of volume analysis can provide a good deal of price action and the psychology of traders, especially when prices are near support and resistance levels – where volume plays a role essential to support any change in trend.
By itself, the volume is not necessarily significant; you should read it against recent and average prices. Let’s look at ways you can apply VWAP.
Add Moving Average
It is essential to add a moving average of the volume on your chart, eg. For example, a 50-day moving average will show the average volume for the last 50 days.
With this added moving average line, one can quickly measure the characteristics of the day’s volume and compare it with the trading volume of the last days and its relative position over the 50 days.
For example, on any given day, the price fell, and the volume rose. How do you know if most of the traded volume was near the day’s high? Or most of the traded volume was at near the day’s low.
We won’t know if we’re only looking at the data at the end of the day. If the day low coincides with a strong support level and most of the increase in volume was near the day’s low, it may mean that the reversal may occur soon, as traders increase their purchases at this level of support.
Therefore, we cannot say that it is bearish when there is a sizeable descending candle with a high volume. We do not have enough information to reach this conclusion.
VWAP can be used on any timeframe to access if you’re being overpaid on a long (buy) or underpaid on a short (sell).
VWAP Indicator Overbought Area Example
VWAP Indicator Oversold Area Example
Another example would be selecting the Stochastic Oscillator and the Relative Strength Index (RSI) as overbought/oversold indicators. Both indicators deal with short-term price extremes and capitalize on a medium reversion trend.
A simple way to avoid overlapping functions is to determine the most crucial input parameters and then choose a technical indicator for each parameter.
Arguably the two most important trading factors are averaged price and volume of an asset (in that order).
Selecting an exclusive price trading signal is a relatively easy thing to do. For example, a trader might use an RSI, a Stochastic, Exponential, or Simple Moving Average (SMA), or many others. However, it is pretty hard to find a technical volume-only indicator.
There are many combined price/volume indicators, such as the Klinger Oscillator. But they do not offer the price independence sought for the second indicator.
How to Calculate the VWAP Indicator
The VWAP model is straightforward to use. With a simple export of volume and price, you can know the historical trade bands.
VWAP, for the most part, acts as a trend confirmation tool. In its simple form:
Sum VWAP = Sum (price + volume) / Sum (volume)
Sometimes software bots use VWAP’s “iterative” calculation because it is easier to maintain in the database and prevents general software from running at less than optimal speed. It uses the last value of the VWAP as the basis for calculating the VWAP in the next operation.
You don’t have to worry about calculating the VWAP values manually because crypto trading software tools like Tradingview do it automatically. All you need to do is specify the number of periods to be considered in the VWAP calculation.
Gunbot and the VWAP Indicator
As I said before, Gunbot doesn’t include the VWAP indicator in its native strategies. But you can still use it for targeting or confirming your entries, and if you got the Gunbot Ultimate License, you could send those VWAP signals with the Tradingview addon for the bot to execute.
Tradingview Addon Settings on the Gunbot GUI
Otherwise, you can still open your position manually if you like to use a VWAP indicator strategy.
Trading Strategies with the VWAP Indicator
When trading using the VWAP indicator, there are different types of strategies you can follow. Examples are the VWAP Pullback, VWAp Fade, VWAP Afternoon High, VWAP Parabolic Short, and many more you can adapt to your cryptocurrency trading style.
Be careful; one of the biggest mistakes traders make when using the VWAP indicator is assuming that a break over or under it automatically means it’s a buy or a sell signal.
It’s easy to get the idea that you should buy or sell a coin if its price is near a specific area but, it is not that easy. What you need to check in the charts is how the price reacts to the VWAP area. If you blindly buy or sell a coin expecting it to reverse, you might get burned.
After researching the volume-weighted average price indicator, I have learned that the most popular setup for crypto day traders is the VWAP pullback. The logic is that the price will pullback in an uptrend before eventually continuing to go up.
Hence, the VWAP pullback strategy allows you to take advantage of that opportunity in the market.
The breakout entry is perfect for crypto traders who are new to the VWAP indicator. If a coin is testing VWAP on the downside, wait for it to close above the VWAP line and make your buy. Essentially, you want to enter a trade when the price is ready to rise again.
VWAP Breakout Example
These rules can also be applied when you’re trading in the opposite direction, provided you’re taking care of the risks.
To quantify your risk tolerance, you need to find out where you are in your crypto trading journey and how much trouble you can handle so that you can choose a trade option that’s right for you.
Like I said before, you can enter manually and let Gunbot exit at your desired profit percentage above your bought price. If you got, your risk defined in your strategy settings would be manageable for you to profit from this simple strategy.
VWAP Consolidation Strategy
The consolidation strategy means you buy below VWAP and sell above VWAP. You can consider the consolidation method as a mean reversion strategy.
When you get changes in a volume model, this should see it as a red flag. Volume changes are often a warning of a trend reversal before it happens. You might be okay with more volume in rallies and less volume in lower price reactions.
Suddenly the volume decreases during gatherings and increases during reactions. That tells you something. There is a good chance that a price reversal is imminent.
When price trends are above the VWAP (VWAP cross), traders are willing to buy higher than average. Volume is a measure of the intensity of buying and selling pressure. It is the belief behind a price movement. The higher the volume, the larger the price movement is usually.
During a healthy uptrend, the volume will increase as prices rise. When prices fall, the trading volume tends to be below average; this is true for an individual asset or the market as a whole.
Price and volume analysis is an excellent tool for making a lot of money on the crypto market. Traders are willing to buy lower than average when price trends below the VWAP (VWAP Cross).
When prices go up or down, and there is a decrease in volume, it is interpreted as a weak price movement because it has tiny traders’ strength and interest.
Benefits of Using the VWAP Indicator
Making a lot of money is the goal of any trader or investor. Price and volume analysis are the tools that will help you achieve this goal. When you do, everything in life is based on odds or probabilities. It is no different in the crypto market or anywhere else for trading.
To be a good crypto trader, all you need to do is put the odds in your favor when trading. A great way to roll the dice in your favor is to analyze the charts correctly. They offer a unique understanding of the market.
VWAP provides a clue as to whether the asset is in demand or its price gets dumped. With both directions of price movement, the higher the volume, the greater the price action.
Supply and demand: Analyzing prices and volumes on a chart will record supply and demand. When the need for an inventory, called purchase orders, exceeds the supply, called sales orders, the price must increase. If the supply exceeds the demand, the price must go down; this is the story of trading coins in crypto.
Since the markets are controlled by humans and human nature never changes, you will have a significant advantage if you analyze the charts correctly. The graphics are an accurate recording of human psychology; this is why you see recurring price patterns on the charts.
These models can be used to predict the future movement of a coin or the market in general. If you are successful, you will earn a lot of money.
Here are the three main benefits of the VWAP Indicator
- Bull or Bear Market Indicator: The VWAP will indicate to you when the crypto market is bullish (price above VWAP) or bearish (price below VWAP)
- Shows the Best Price to Buy or Sell: Crypto trading is not always about buying or selling exactly “when” there is a signal. Sometimes it’s better to be patient and buy or sell at the “best” average price possible.
- Average Price Instead of Moving Average: The VWAP allows investors to know when to enter and exit the market with greater accuracy and without disrupting the crypto market like day traders who follow trends.
The VWAP is an excellent indicator for choosing which altcoins to buy. However, it becomes more powerful when used with other trading strategies.
You can use the VWAP formula to gauge if a coin is currently in an uptrend or downtrend. The VWAP can help you as an investor make more educated trades.
Other Volume Crypto Trading Indicators
Volume is the indicator that technical analysts constantly look at to determine whether a move in the markets, a single token, or a single market has conviction. It can also be the easiest to understand all the indicators.
We look at volume from a dynamic perspective; we see a level recognizable buy and sell because the trading volume is essential.
Moving Average Volume
A Volume Moving Average (VMA) is like any other moving average, only applied to volume instead of price. It helps smooth out a coin’s volume surges, making it easier to see an altcoin’s general trends and volume patterns.
VMA typically plots/overlays the volume indicator, showing the average volume over the last number of bars/periods. The default is typically 20 periods; however, you can adjust the input values according to the period of use.
The volume moving average on crypto charts and graphs can help you see if institutional and professional traders are buying or selling.
Statistics like these can help you judge the short-, mid-and long-term trends of the cryptocurrency market and, if you’re lucky, make accurate predictions.
VO uses the difference between two moving volume averages to determine whether the trend is up or down. The rapid volume moving average is usually throughout 14 bars/period. Slow volume moving average is typically 28 bars/period.
Periodically, analysts wonder whether the length of these periods is appropriate or not. Some say 14 and 28 are too conservative, while others argue that these numbers are not sound enough. Many short-term traders use 5-10 (fast MA) and 20 (slow MA) as entry values.
This indicator outlines favorable prices above the zero line and unfavorable prices below the line.
- A favorable price implies enough market support to continue driving price activity toward the current trend (up or down).
- A negative value implies an absence of support, and that prices may start to stagnate or reverse.
- A price more than zero indicates that the moving average of the short-term volume has exceeded the moving average of the long-term trading volume; this shows that the short-term trend is higher than the long-term trend.
- An ascending volume oscillator usually suggests a strengthening of the trend, while a falling volume oscillator usually suggests a weakening of the movement. But this is not always true.
- Rising prices with higher volume in the short term are bullish, as are falling prices with lower volume. Falling prices with greater trading volume or increasing prices with less volume indicate market weakness.
The volume oscillator confirms the price movement. When the volume is low but the profits and losses are large, the pros are likely to be overly enthusiastic about a possible turn in the market.
The VWAP is a popular way to measure the average price of an asset and is a standard indicator that you can use on many trading platforms and charts. The VWAP calculation is more effective for intraday trading because it is a lagging indicator based on historical data rather than just recent happenings.
With volume indicators exposing a lot of volume activity relative to what price is doing, negative divergences are exposed early before the market collapses to the downside. Additionally, individual investors and traders can now see that the asset is at significant risk of a top or correction and avoid buying on a top.
It’s easy for online investors to get caught up in the idea that buying coins below the VWAP is a good thing, but it can be too simplistic. Buying coins at a discount is great, but you shouldn’t ignore the upper cap of the VWAP.
For example, if you buy coins at a discount and the price continues to dive on an already downward solid movement, you may be left with coins worth less than what you paid for them.
Though it might seem like you are getting a bargain, there are drawbacks. If you buy coins under the VWAP, but the price keeps plummeting on a solid downtrend, you may end up losing money in the long run.
Consider the reasoning. Would you buy under the price when it’s on a downward trend?
The size of the distance from the VWAP that coins are purchased or sold is a crucial component. But given all other factors involved in day trading, it can’t be the only thing to analyze.
Tradingview and other charting tools allow you to plot the VWAP on intraday charts alongside indicators such as moving averages. These nuances will give you the best chance of maximizing your day-to-day trading software to help you with your VWAP related trades.
When starting with the VWAP indicator, you will not want to use it blindly. Trading on price action alone takes many years of experience.
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