How to Trade With VWAP Indicator in Forex
The Volume Weighted Average Price (VWAP) helps eliminate any unwanted price fluctuations during the trading period. Using this indicator, traders are able to identify the trending buying and selling prices in the market. In our article, we take a look at the VWAP indicator and how to use it.
What is the VWAP indicator?
The VWAP indicator is a trading tool that helps traders receive the best price signal to trade in the market. VWAP is a currency pair’s average trading price based on the currency pair’s trading volume and prices at specific time periods. It provides traders with the market trend and the currency pair’s current value. It can be set on an intraday chart, and it is automatically reset as a new trading day starts. It provides traders with a benchmark in the form of an average trading price based on which traders can place buying or selling orders.
How to calculate VWAP?
VWAP can be calculated with the following steps:
- Choose a timeframe for which you want to calculate the average price, like a 1-minute chart, hourly chart, 4-hour chart etc.
- Calculate the currency pair’s typical price for the initial pair by adding the high price, low price, and close price and dividing this value by 3 (H+L+C/3).
- Multiply the typical price ascertained by the currency pair’s volume in that period. You will receive the value that we call TPV, or typical price value.
- Continue the same calculation to find the typical price for all other periods.
- Add the typical price values of all the periods and terms it as cumulative TPV. You can ascertain this by adding the current TPV to the precious values. You will get increasing values as days will pass because of the increasing number of periods being considered.
- The total the cumulative volume of the currency pair by adding the current volume to the prior volumes. This value will also increase as the trading day continues.
- Calculate the VWAP indicator value by dividing the cumulative TPV by the cumulative volume for that period. This will give you a VWAP for each period.
- The values will be displayed on the price chart as a line and help you identify ideal entry and exit points around it.
How is the VWAP indicator used?
VWAP can be used to interpret the important price fluctuations in the forex market. It helps in identifying an exact price level in a particular time frame where the momentum is more or less. A higher momentum will depict the ideal time to enter the market, and a lower momentum will depict the ideal time to exit it.
- Whenever a currency pair is trading below the VWAP line, it is considered that the market is in a downtrend and signals traders to short the trade.
- Whenever a currency pair is trading above the VWAP line, it is considered that the market is in an uptrend and signals traders to long the trade.
The VWAP indicator can also be used to identify market liquidity, support and resistance levels. Since the indicator considers both the price and volume of the currency pairs, it is able to measure the currency pair’s liquidity. When the VWAP indicator value is close to the currency pair’s current price, it means that there is high trading volume and liquidity is high. This indicates traders to place long orders in bullish and short orders in bearish markets. On the other hand, when the VWAP indicator value is far away from the currency pair’s current price, it means that there is less trading activity or volume going on and liquidity is low. This situation indicates traders to hold onto the trades for some time. Support and resistance levels are also easily identifiable with the VWAP indicator, and that helps in determining potential market reversals. Whenever the currency pair is trading above the VWAP line, it indicates that there exists a strong buying pressure in the market, and prices will continue to increase. This leads the indicator to identify the maximum price until the currency pair increases as the resistance level and starts falling thereafter.
Technical indicators to use with the VWAP indicator
Trend lines with VWAP generate ideal support and resistance levels in the market. It helps in determining the trend direction and potential reversal points. Whenever the trend line touches the currency pair prices, and the prices are below the VWAP indicator, it indicates that there is a chance of the currency pair prices having a bearish market sentiment. This signals traders the ideal support levels, after which the markets can reverse, allowing them to place long orders at the support level. On the other hand, when the trendline touches the currency pair prices, and the prices are above the VWAP indicator line, it indicates a bullish market sentiment. It helps in identifying an ideal resistance level at which traders can place short orders with an expectation of the market reversing in a bearish trend.
Pivot points combined with the VWAP indicator help in receiving confirmed market reversal signals. The pivot points use the currency pair’s price movement and the average price level to signal whether the market can reverse or not. It is represented on the price chart as a thick black horizontal line. Whenever the currency pair prices are below the black line, there are orange pivot levels surrounding it, indicating the ideal support level in the market. This is an indication that as soon as the prices touch these support levels, the market can potentially reverse into an uptrend, providing traders with an opportunity to place long orders. Whenever the currency pair prices are above the black line, the orange pivot levels surrounding it indicate the ideal resistance levels in the market. This is an indication that as soon as the prices touch these resistance levels, the market can potentially reverse into a downtrend, providing traders with an opportunity to place short orders.
Bollinger bands used in conjunction with the VWAP indicator provide traders with near-to-accurate entry and exit price levels. It consists of the three Bollinger bands:
- The upper band indicates a bullish market momentum.
- The lower band indicates a bearish market momentum.
- The middle band indicates the average currency pair price movement.
When the currency pair price trades above the middle and near the upper band of the Bollinger Bands indicator and also above the VWAP indicator line, it confirms a bullish market sentiment. This signals traders to place buy or long orders in the market, which is in a continued uptrend. On the other hand, when the currency pair price trades below the middle and near the lower band of the Bollinger Bands indicator and also below the VWAP indicator line, it confirms a bearish market sentiment. This signals traders to place a sell or short order in the market, which is in a continued downtrend.
Different VWAP indicator trading strategies
One of the most common VWAP strategies is the VWAP bands strategy. In this, traders can draw an upper and lower band around the VWAP indicator and wait for the currency pair price to move near either of these bands. The width of the band can be selected by a few standard deviations above and below the indicator’s line. Whenever the currency pair price reaches the upper band, traders are signalled to place long orders. Whenever the currency pair price reaches the lower band, traders are signalled to place sort orders. Traders can also place the stop loss order just outside the VWAP band line to ensure that losses are minimised if the market starts moving against the trader’s preference.
The trailing stop VWAP indicator strategy means that a forex trader buys or sells a currency pair whenever the current price moves a percentage above or below the VWAP indicator line. Suppose the trader sets the trailing stop at five percent above or below the VWAP indicator. In that case, the trader will enter the market if the currency pair price moves five percent above the VWAP line and sell if the currency pair moves five percent below the VWAP line. This helps traders put a limit to how much they are willing to lose in a trending market and lock in profit simultaneously.
The pairs trade VWAP trading strategy helps traders simultaneously take opposite positions in the market. This means traders are able to take long positions in currency pairs that are trading below the VWAP line and short positions in currency pairs trading above the VWAP line. When traders trade the two currency pairs simultaneously in this manner, the pairs eventually converge as the market trends in a particular direction. They reach their respective VWAPs and provide traders with an opportunity to benefit from both falling and rising markets simultaneously.
The pullback trading strategy is based on the fact that when a currency pair makes an extremely large move in the market, it often retraces back to its original position near the VWAP line before resuming the original market direction. This means that during an uptrend, if a currency pair price makes an extremely large move towards the upward direction, away from the VWAP line, it signals traders that the currency pair price will fall back to this VWAP line, allowing them to short the trade in that timeframe. Then, traders can place long orders once the currency pair price reaches its original VWAP level. On the other hand, during an uptrend when a currency pair significantly falls, it signals traders to place long orders as the price will increase back to the original VWAP line. Thereafter, traders can place short orders and profit from the continued downtrend.
The price cross strategy means that when a currency pair price crosses the VWAP line from below, it indicates a bullish outbreak. This signals traders to place long or buy orders. Conversely, when the currency pair price crosses the VWAP line from above, it indicates a bearish outbreak. This signals traders to place short or sell orders.
How to trade with the VWAP indicator
- Identify either a strong bullish or bearish trending market.
- Calculate the VWAP value and include it on your price chart.
- Identify if the current currency pair prices are trading above or below the VWAP line.
- Place a market order based on the currency pair‘s placement with respect to the VWAP line.
- Hold the trades if you feel that the market activity has slowed down.
- Identify any price crossovers with the VWAP line to enter or exit uptrends and downtrends, respectively.
- Monitor the market to exit long trades when a bearish reversal is taking place and exit short trades when a bullish reversal is upcoming.
Trade with the VWAP indicator seamlessly
The VWAP indicator is a useful trading strategy for day traders. It provides day traders with ideal price levels to identify market continuation signals and reversals. With our forex trading platform, you can combine the VWAP indicator with several other indicators to receive confirmed market signals around the resistance, support, and entry and exit price levels. Get started today. Sign up for a live trading account or try a risk-free demo account.
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