VWAP - Volume Weighted Average Price
What is VWAP
VWAP (Volume Weighted Average Price) is the average price over a specific period, weighted by volume. It's not simply an average of prices, but a "true average price" that reflects how much volume was actually traded at each price level.
VWAP was originally developed as a benchmark for institutional investors to evaluate the quality of their trade execution. When institutions execute large orders, buying below VWAP means they got a better price than the market average, while buying above VWAP means they paid an unfavorable price.
VWAP Calculation Principles
The VWAP calculation formula is as follows:
VWAP = (Cumulative Sum of Price x Volume) / (Cumulative Sum of Volume)
The representative price for each candle typically uses TP (Typical Price).
TP = (High + Low + Close) / 3
Calculation Example
| Time | High | Low | Close | TP | Volume | TP x Volume | Cumulative TP x Vol | Cumulative Vol | VWAP |
|---|---|---|---|---|---|---|---|---|---|
| 9AM | 105 | 100 | 103 | 102.7 | 500 | 51,350 | 51,350 | 500 | 102.70 |
| 10AM | 108 | 103 | 106 | 105.7 | 300 | 31,710 | 83,060 | 800 | 103.83 |
| 11AM | 107 | 104 | 105 | 105.3 | 400 | 42,120 | 125,180 | 1,200 | 104.32 |
VWAP is calculated from cumulative data from the trading start to the current moment, so as time passes, the impact of new data decreases and VWAP's movement range narrows. This is an important characteristic of VWAP.
Why Institutional Investors Use VWAP
Institutional investors need to execute large orders worth hundreds of millions or billions of dollars. Buying all at once would significantly move prices, so they spread purchases throughout the day. VWAP is the key benchmark for measuring execution performance.
Buying below VWAP = Good execution Buying above VWAP = Poor execution
For this reason, institutional large orders tend to concentrate near VWAP, which is why VWAP naturally acts as support and resistance.
Using VWAP as Support/Resistance
Relationship Between Price and VWAP
| Price Position | Interpretation | Trading Perspective |
|---|---|---|
| Price > VWAP | Most market participants are profitable | Buyers dominant, bullish |
| Price < VWAP | Most market participants are in loss | Sellers dominant, bearish |
| Price near VWAP | Equilibrium state | Waiting for direction |
VWAP's power lies in it being not just a technical line but the actual price level where trading concentrated. When price falls below VWAP, most buyers that day are in loss, increasing selling pressure; when price rises above VWAP, buyers are profitable, encouraging additional buying psychology.
VWAP Bounce Strategy
In uptrends, the pattern where price pulls back to VWAP and then bounces is very common. This is called a "VWAP bounce" and is a favorite strategy of many day traders.
- In an uptrend with price trading above VWAP
- When price temporarily dips to VWAP
- Enter long after confirming a bounce from VWAP
- Set stop loss below VWAP
VWAP Cross Strategy
Using the moment when price crosses above or below VWAP as a trading signal is another approach. However, like moving average crosses, this strategy can produce false signals, so it's good to use additional filters like RSI or volume confirmation.
Differences Between VWAP and Moving Averages
Both VWAP and Moving Averages (MA) show "average" price levels, but there are fundamental differences.
| Item | VWAP | Moving Average (MA) |
|---|---|---|
| Weighting | Volume-based | Time-based (SMA) or recent-weighted (EMA) |
| Reset | Resets at start of each trading day | Continuous calculation without reset |
| Suitable timeframe | Intraday | All timeframes |
| Meaning | Actual average execution price | Close-based statistical average |
| Primary users | Institutional investors, day traders | All investors |
| Support/resistance basis | Actual trading concentration | Psychological reference line |
The biggest difference is that VWAP gives more weight to price levels with higher volume. For example, if large volume traded at a specific price level, VWAP is pulled significantly toward that price, while simple moving averages don't reflect such information.
Limitations of VWAP
Intraday Reset Issue
Traditional VWAP resets at the start of each trading day. Therefore, its usefulness drops significantly on daily charts or higher timeframes. VWAP is fundamentally designed as an intraday indicator and is most effective on charts from 1-minute to 1-hour.
Since cryptocurrency markets trade 24 hours, VWAP values can differ depending on where you set the "trading day" start. Most charting platforms reset at UTC 00:00, but this should be kept in mind.
Late-Day Insensitivity
Because VWAP uses cumulative calculation, the impact of new trading data diminishes as the trading day progresses. This means even if large price movements occur late in the day, VWAP won't move much.
Limitations in Ranging Markets
In ranging markets where price fluctuates around VWAP, VWAP cross signals occur frequently with low reliability. In such periods, use volatility indicators like Bollinger Bands or ATR to determine whether there's clear directionality.
Anchored VWAP
Anchored VWAP emerged to overcome the limitations of traditional VWAP's intraday reset. Anchored VWAP calculates VWAP from a specific point chosen by the user, not from the trading day start.
Usage examples include:
- Anchor from major low: Starting from a recent significant low to identify the average cost of buyers since then
- Anchor from major high: Starting from a recent significant high to identify the average cost of sellers since then
- Anchor from event: Calculating VWAP from market-impacting events like earnings releases, halvings, or regulatory announcements
Anchored VWAP provides meaningful support/resistance levels on daily and weekly charts as well, making it useful for swing traders and longer-term investors.
Using VWAP in Cryptocurrency Markets
VWAP is particularly effective in cryptocurrency markets in the following situations:
- Major coins (BTC, ETH): Sufficient volume makes VWAP support/resistance highly reliable.
- Checking exchange differences: Like OBV, using aggregated data from multiple exchanges improves accuracy.
- Reference point in volatile markets: In cryptocurrency markets prone to sharp rallies and crashes, VWAP serves as an objective benchmark for judging whether "current price is overheated or undervalued."
VWAP Standard Deviation Bands
Some charting platforms allow adding standard deviation bands to VWAP to visualize how far price has deviated from VWAP. This is similar in concept to Bollinger Bands.
- +1 Standard Deviation: Beginning overbought zone
- +2 Standard Deviation: Extreme overbought
- -1 Standard Deviation: Beginning oversold zone
- -2 Standard Deviation: Extreme oversold
When price touches the VWAP 2 standard deviation band, mean reversion probability increases.
Summary
VWAP is the "true average price" reflecting volume, serving as a benchmark for institutional investors and a powerful support/resistance tool for individual investors. It's most effective on intraday charts, and using Anchored VWAP extends its usefulness to wider timeframes. Like other technical indicators, signal accuracy improves when VWAP is used together with trend and momentum indicators rather than alone.
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