VWAP Indicator

Platform: MT4 Type: Trend Last update: August 2, 2024

The VWAP indicator is actually the Volume Weighted Average Price indicator for the forex market and it shows the average true price of a currency pair, weighted by volume.

If you are a beginner trader and the above description doesn’t tell you much – don’t worry, we will explain it further in that article. The VWAP is simply a very similar tool to the moving average. However, many traders much more prefer the VWAP over traditional moving averages as it provides some powerful benefits.

The version that we share here is dedicated for MT4 only and it just consists of three lines: monthly, weekly, and daily. We will dive deep into details on how to use and read the indicator.

How does it work? How to apply in trading?

VWAP vs Moving Average

The traditional moving averages, as you probably know, are based on the closing prices. Therefore, they represent the closing price of a financial asset or currency pair.

On the other hand, the VWAP continuously plots the average price at the weighted volume. As these calculations are ongoing, many traders find it to be a more precise and reliable indicator, better reflecting price action. They believe that volume is an important variable in confirming trends, trend reversals, supports & resistances, breakouts.

Formula

The calculation for the volume weighted average price (VWAP) is following;

VWAP= ∑Typical Price * Volume / ∑Volume

The typical price is the average of the High, Low, and Close of a chosen period. Next, the typical price is multiplied by the volume. This value alongside the volume for that session is calculated. These are known as cumulative volumes and cumulative typical price times volume (TP x V). The last calculation is dividing the cumulative TP x V by the cumulative volume to recive the volume weighted average price for a given period.

It may look a bit complex, but the free VWAP for MT4 does all the math in the background, providing traders with the lines. These lines are discussed and explained in the next part of the article.

Trading Rules Explanation

Signals provided by that gauge are quite simple and shouldn’t cause you difficulties. The most powerful signals generated by the indicator occur after the crossover of monthly and weekly lines. Simply follow the suggestions below.

Buy Trade with VWAP

The trend is considered bullish when the weekly line (red) goes above the monthly one (green). You should be looking for trade opportunities only in the direction of the underlying trend. In this case, for long trades. Despite the fact that the VWAP doesn’t provide super-precise entry points, a good practice is to seek them when the price is below the daily line (yellow) and/or near weekly line (red).

Set your Stop Loss below the last swing low of the market and set your Take Profit once your trade hits at least the 1:2 risk to reward ratio.

You can support your decisions with some good and accurate entry point providers like the MBFX Timing indicator.

Example of buy trade with VWAP indicator.

Sell Trade with VWAP

The trend is considered bearish when the weekly line (red) goes below the monthly one (green). You should be looking for trade opportunities only in the direction of the underlying trend. In this case, for short trades. Despite the fact that the VWAP doesn’t provide super-precise entry points, a good practice is to seek them when the price is above the daily line (yellow) and/or near weekly line (red).

Set your Stop Loss above the last swing high of the market and set your Take Profit once your trade hits at least the 1:2 risk to reward ratio.