In crypto trading, understanding what other traders are doing with the same asset is as important as having a solid trading strategy. The Volume Weighted Average Price indicator is a valuable tool for gaining insights by analysing trading volume. Let’s explore this indicator further.
1. What is VWAP?
VWAP, or Volume Weighted Average Price, monitors the price and trading volume of assets in a day, helping traders decide when to buy.
1.1. VWAP: How Does It Works in Crypto Trading
The Volume Weighted Average Price in crypto trading works by finding the average price of a cryptocurrency throughout the day, taking into account the trading volume. It is like figuring out the typical price of a specific crypto coin over a day, but it gives more weight to the prices during periods of higher trading activity.
This helps crypto traders see when the price is above or below the daily average, aiding them in making decisions to buy when it is below VWAP and sell when it is above, all to seize profitable opportunities in the crypto market.
2. How to Calculate VWAP
Here is the formula for calculating VWAP:
- Σ(P * V) represents the sum of (Price * Volume) for all trades during the day.
- ΣV represents the sum of all trading volumes that occurred during the day.
So, you can sum up the values of (Price * Volume) for all trades and divide by the sum of all trading volumes to get the VWAP.
3. Steps to Launch VWAP on a TradingView Chart
Launching VWAP on a TradingView chart is an eight-step process.
- Step 1: Sign UP on TradingView
Create an account on the TradingView website.
- Step 2: Search for a Random Chart
Enter a cryptocurrency name or trading pair name to find a chart.
- Step 3: Launch the Chart
Click on the chart you want to analyse.
- Step 4: Click on Indicator Tab
Locate and click the indicator tab.
Type VWAP in the search bar.
Click on ‘Volume Weighted Average Price’ to add it.
- Step 7: Configure Indicator
Use default settings, no need to change anything.
- Step 8: Analyse the Chart
VWAP will now display on your chart for analysis.
4. What VWAP Tells Crypto Traders
The prime analysis that can be made using the Volume Weighted Average Price indicator are:
VWAP tells traders if the current crypto price is reasonable. If it is below VWAP, it might be a good time to buy, and if it is above, it might be a good time to sell.
It shows if the crypto’s price is higher or lower than the average for the day. If it is above VWAP, it suggests an upward trend, and if it is below, it hints at a potential downward trend or reversal.
VWAP helps confirm whether a price move is strong. If the price change is accompanied by high trading volume, it is more likely to be a real price breakout or breakdown, which is important for traders to know.
Endnote
In conclusion, the Volume Weighted Average Price is a crucial tool for crypto traders. It assesses the average price of a cryptocurrency throughout the day, emphasising periods of high trading activity. This helps traders make informed decisions – determining the fairness of current prices, identifying intraday trends, and confirming the strength of price movements through trading volume. Additionally, calculating VWAP is a simple process that can be easily applied on TradingView charts. VWAP offers traders valuable insights, guiding them to opportune moments for buying and selling in the dynamic world of cryptocurrency trading.