Introduction to the VWAP Indicator
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.
The indicator is displayed directly on the main trading chart.
It fits all kinds of timeframes and currency pairs, but we suggest using it on lower timeframes (up to H1).
The default settings can be modified directly from the input tab. Feel free to experiment with the settings and parameters to fit your personal preferences.
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.
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.
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.
As always, to achieve good results, remember about proper money management. To be a profitable trader you need to master discipline, emotions, and psychology. It is crucial to know when to trade, but also when not to trade. Avoid trading during unfavorable times and market conditions like low volume/volatility conditions, beyond major sessions, exotic currency pairs, wider spread, etc.
How to set up the VWAP indicator in MT4?
Copy and paste the VWAP.ex4 or VWAP.mq4 indicator files into the MQL4 folder of the Metatrader 4 trading platform.
You can gain access to this folder by clicking the top menu options, which goes as follows:
File > Open Data Folder > MQL4 > Indicators (paste here).
Now go to the left side of your MT4 terminal. In the Navigator find the gauge name, right-click it and select Attach to the chart.
The VWAP indicator is well worth adding to your trading collection but remember about having realistic expectations. Just like any other technical analysis tool, is not capable of providing accurate signals 100% of the time. Thus, this forex indicator provides false signals occasionally. Its performance will vary significantly depending on market conditions. Feel free to develop your own trading system based around it.
Click the link to browse more free forex indicators.
VWAP Indicator Free Download
To download the VWAP Indicator for Metatrader 4 (MT4) for free just click the button below: