Intraday trading of cryptocurrencies is very different from investing in them, so the tools used for analysis are different. One of them is VWAP.

What is VWAP

VWAP (Volume-Weighted Average Price) is an indicator used by crypto traders. Most often it is used for intraday transactions. VWAP is very similar to a moving average, but has greater smoothness. The indicator is calculated as the ratio of the product of cryptocurrency prices by the corresponding volume to the sum of volumes:

VWAP= ∑(Volume*Price)/∑Volume

In the above formula, Volume is “volume”, Price is “price”. As a rule, the so-called “Typical price” is used for calculation, which is the arithmetic average of the closing price, the maximum and minimum of the trading session:

Typical price = (H + L + C)/3

Where H is the maximum of the trading session (High price), L is the minimum of the trading session (Low price), C is the closing price (Closing Price).

In real trading, you will not have to calculate anything manually, since any trading and analytical platforms will do it all automatically. The indicator is recalculated every trading session, however, if necessary, you can set other parameters: week, month, year, and so on.

Trading with VWAP

In terms of its graphical design, VWAP is not much different from a simple moving average. Actually, that’s why it can be interpreted in a similar way. A number of traders use the VWAP price crossing from bottom to top as a buy signal, and from top to bottom as a sell signal.

You can, however, do everything exactly the opposite. In other words, if the price is below VWAP, then you buy, hoping that your cryptocurrency is undervalued, and if it is higher, you sell, hoping that it is overvalued.

The indicator is also used to identify areas with higher liquidity. But this is mainly done by institutional investors who have a lot of cash.

VWAP can be clearly seen in the figure below. The indicator line itself is shown in blue. The two green lines show standard deviations from the volume-weighted average price.

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Source: tradingview.com

Based on the figure, one more strategy can be identified – channel trading. In this case, its upper and lower boundaries will be the lines of standard deviations. If the price reaches or is higher than the first one, then it is worth selling. If it drops to the lower limit, then it is worth buying.

You can also come across an indicator such as Anchored VWAP.

What is Anchored VWAP

Anchored VWAP is the same VWAP, only specified from a certain point in time. Visualizing and interpreting its signals is no different. For example, in the figure below you can observe Anchored VWAP on the Bitcoin chart from the March all-time high:

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Source: tradingview.com

And this is what Anchored VWAP looks like for the last two months (May-June 2024):
1906202403.jpg

Source: tradingview.com

The point is that you can set the indicator from any point in the past. Moreover, this can be done on any timeframe. Below is the Anchored VWAP on the 15-minute chart starting at midnight June 18, 2024:

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Source: tradingview.com

In general, you can select the indicator parameters for yourself. The main thing is that it brings you profit, and whether it is in the classical interpretation of signals or not is not important.

Benefits of VWAP

The advantages of VWAP include the following:

  • smoothing using volumes, which makes averaging more accurate;

  • quite variable indicator settings, for example, you can use different approaches to calculating prices;

  • Widely used in trading strategies: trading in a channel, using the indicator as support/resistance, use in combination with other trading indicators;

  • can be built on any timeframes from any points in the past.

Disadvantages of VWAP

The disadvantages of the indicator are as follows:

  • no forecasts can be made on its basis; it only provides a guide to the market situation;

  • like moving averages, VWAP is lagging in nature;

  • volume data on different exchanges will differ, so the picture in VWAP may also differ;

  • mainly used for intraday trading, not very suitable for investment;

  • not applicable as the only analytical tool.

Conclusion

Thus, VWAP is one of the indicators that can help for intraday trading. However, predictions cannot be made based on it. VWAP is a fairly diverse tool that can be customized to suit you. It will be most effective in combination with other trading indicators.