VWAP or Volume Weighted Average Price is a technical trading indicator available with the price and shows the possible direction by working at a dynamic level.
You probably have heard about support/resistance in FX trading. It is a line or a prize zone from where the market is highly expected to reverse. There are both dynamic and static support and resistance levels in trading, and both are profitable, depending on the trading condition. Moreover, volume in support or resistance trading makes the VWAP more profitable for traders.
The following section is for you to enrich your trading experience by applying volume to the price. Because here, we will see a complete guide on VWAP trading, including buying and selling trades.
VWAP indicator: basics
VWAP finds the most effective average price of a currency pair by focusing on the average volume at a specific area rather than the closing candle. As a result, this tool can indicate the future price direction where most traders are heading.
If we consider the average price on the number of candles, we may find inappropriate price directions. The average price of some candles or moving average (MA) does not consider what is happening on the higher or lower timeframes and the maximum volumes.
Did the currency pair close higher with a higher volume? Did the currency pair make a new high with the support of volume?
These are significant facts that every trader should know to understand the overall context effectively. That’s why VWAP indicators work better than traditional MAs. Moreover, this indicator can add more value than the MA value of 20, 50, or 200.
Let’s see what a standard VWAP indicator looks like.
VWAP calculation
We can easily calculate the VWAP by adding the trading volume on a particular time frame. Here the trading volume means the number of orders multiplied by the dollar value of each order. So if you set it as an equation, it will be like this.
The primary users of this tool are institutional traders wherever acquiring or out with a small market impact. Usually, institutional trades buy an instrument down the VWAP line and sell once the value is higher.
In forex trading, VWAP may go as a trend confirmation tool besides having alternative indicators. For example, if the market context is bullish and the price crosses above the VWAP, concentrate on buy trades only. Similarly, if the price crosses down the VWAP, focus on sell trades only.
Best VWAP setting for intraday trading
This indicator is available for free on most trading platforms, and it is easily customizable by changing its calculation method and periods.
In general, the VWAP is an effective indicator as it shows the value based on the trading session and HLC3, as shown in the image below.
However, it is better to change the Anchor period to weekly for intraday and swing trading and keep the source the same as HLC3.
Moreover, VWAP has upper bands and lower bands that also work as a minor resistance and support to the price.
VWAP trading system
In this section, we will see an exact trading strategy using the VWAP indicator. Moreover, to increase the trading probability, we will use MAs and MACD. Let’s see indicator settings for this strategy:
- VWAP (anchor period: week, source – HCL3)
- MA (exponential 20)
- MACD (12,26,9)
Let’s plot these indicators in a chart and see how it looks.
In the above image, we can see all these indicators are set. We intend to take the buy trade once the higher time frame’s price action is bullish. Similarly, focus on sell trades if the higher time frame is bearish.
How to buy
Let’s what conditions we need to take a buy trade:
- The higher time frame direction is bullish
- MACD histogram turned bullish by moving above the zero levels
- Price corrected lower and bounced back from the dynamic 20 EMA and VWAP
- A bullish candle closed above the VWAP level
The entry is valid after the candle closes, and we can hold the trade until a significant resistance level appears. Moreover, the ideal stop loss level is below the recent swing with some buffer.
The above image shows how to take a buy trading using VWAP and MAs.
How to sell
Let’s what conditions we need to take a sell trade:
- The higher time frame direction is bearish
- MACD histogram turned bearish by moving below the zero levels
- Price corrected higher and bounced back from the dynamic 20 EMA and VWAP
- A bearish candle closed below the VWAP level
The entry is valid after the candle closes, and we can hold the trade until a significant support level appears. Moreover, the ideal stop loss level is above the recent swing high with some buffer.
The above image shows how to take a sell trading using VWAP and MAs.
Final thoughts
The above section shows a complete guide on VWAP trading in bullish and bearish scenarios in the FX market. However, the global forex market is the world’s biggest financial market where some risks are unavoidable. Therefore, in any trading strategy, managing the trade should be perfect.
Using VWAP in the trading system will increase the accuracy, but there is no way to say that it can make you rich by buying or selling from VWAP levels. The best approach is to use appropriate trade management in every trading position. Moreover, finding the market context and understanding available trading economic releases are essential.
