How to Trade with VWAP and MVWAP
By adding volume-weighted analysis, Trading with VWAP (Volume Weighted Average Price) and MVWAP (Moving Volume Weighted Average Price) can significantly improve trading techniques. In contrast to MVWAP, which presents a moving average of VWAP values over time, VWAP serves as a baseline for assessing intraday value. Let’s quickly go through VWAP (Volume Weighted Average Price) and MVWAP (Moving Volume Weighted Average Price) and their formulas before getting into trading techniques.
VWAP and MVWAP
VWAP (Volume Weighted Average Price) is a trading indicator that determines a security’s average price based on the volume of transactions that surround it. It aids traders in determining whether they are buying or selling relative to the general average price of deals at a favorable price. MVWAP (Moving Volume Weighted Average Price), on the other hand, is a development of VWAP that includes a moving average component. It computes the VWAP over a predetermined time frame and updates it often with fresh trading data. This facilitates the detection of trends and moderates transient swings. Technical analysts frequently use MVWAP to identify probable support and resistance levels. Both the VWAP and the MVWAP are useful tools for various traders to make judgments and comprehend how securities behave in the market.
Understanding the Functionality of MVWAP and VWAP
Traders with longer-term positions tend to employ MVWAP, whereas VWAP concentrates on daily computations, making it more appropriate for intraday analysis. Both indicators are special kinds of price averages that take volume into account, giving a more accurate picture of price change. These metrics also act as benchmarks for people and organizations, allowing them to evaluate the standard of their order execution and determine if it was successful or not.
Calculating VWAP (Volume-Weighted Average Price) and MVWAP (Moving Volume-Weighted Average Price)
VWAP (Volume-Weighted Average Price) is a valuable tool for traders to determine the average price of a security throughout a trading day, considering both volume and price. It offers perceptions about a security’s worth and trend. Traders can also use MVWAP to analyse the moving average volume-weighted price. This guide demonstrates how to calculate VWAP and MVWAP using a specific trading day’s data.
Trading Day Data
| Date-Time | High | Low | Close | Typical Price | Volume | TP*V | Cumulative TP*V | Cumulative Volume | VWAP |
|---|---|---|---|---|---|---|---|---|---|
| 09:00 AM | $10 | $9 | $9.5 | $9.5 | 1000 | 9500 | – | – | – |
| 09:05 AM | $9.8 | $9.4 | $9.7 | $9.63 | 1200 | 11556 | 11556 | 1200 | $9.63 |
| 09:10 AM | $9.9 | $9.5 | $9.8 | $9.73 | 1500 | 14595 | 26151 | 2700 | $9.67 |
| 09:15 AM | $10 | $9.7 | $9.9 | $9.87 | 800 | 7896 | 34047 | 3500 | $9.72 |
| 09:20 AM | $9.6 | $9.2 | $9.4 | $9.4 | 2000 | 18800 | 52847 | 5500 | $9.61 |
| 09:25 AM | $9.5 | $9.1 | $9.2 | $9.27 | 1500 | 13905 | 66752 | 7000 | $9.54 |
Using 5-minute intervals, we will calculate the VWAP for each period and subsequently determine the MVWAP using a 10-period average.
Calculating VWAP
Step 1: Determine the Typical Price
- For each period, calculate the typical price by adding the high, low, and closing prices and dividing the sum by three.
- Example: At 09:05 AM, the typical price is (9.8 + 9.4 + 9.7) / 3 = $9.63.
Step 2: Calculate TP*V
- Multiply the typical price by the volume traded during each period.
- Example: At 09:05 AM, TP*V = $9.63 * 1200 = $11,556.
Step 3: Maintain Cumulative TP*V and Cumulative Volume
- Keep a running total of TPV values, known as cumulative TPV, by adding the most recent TPV to the prior cumulative TPV (excluding the first period).
- Similarly, maintain a cumulative volume by repeatedly adding the most recent volume to the preceding volume.
- The cumulative TP*V and cumulative volume should increase throughout the day.
Step 4: Calculate VWAP
- Divide the cumulative TP*V by the cumulative volume to determine VWAP for each period.
- Example: At 09:05 AM, VWAP = $11,556 / 1200 = $9.63.
Repeat these steps for each subsequent period to calculate the VWAP for each interval.
Calculating MVWAP
Step 1: Wait for the First 10 Periods
- Allow the first 10 periods to complete before calculating MVWAP.
Step 2: Average the First 10 VWAP Calculations
- Add up the VWAP values from the first 10 periods.
- The average is determined by multiplying the total by 10.
Step 3: Initial MVWAP
- Starting from the 10th period, the average of the first 10 VWAP values becomes the initial MVWAP.
Step 4: Include the Most Recent VWAP
- As each new period completes, update the MVWAP calculation by averaging the most recent 10 VWAP values.
- Include the VWAP value from the most recent period and exclude the VWAP value from 11 periods earlier.
By following these steps, you can calculate both the VWAP and MVWAP for each interval, providing insights into the average price and trends based on volume-weighted information.
Chart Implementation
Calculations of VWAP and MVWAP can be automated using charting software. It is frequently possible to program VWAP or MVWAP indicators using the equations given above if the software doesn’t already have any built-in indicators.
To Apply VWAP on a chart
- In the charting software, choose the VWAP indicator.
- The Volume-Weighted Average Price will be represented visually on the chart by the VWAP line.
- Normally, VWAP has no variables that can be changed.
For MVWAP
- Depending on your preferences, change the calculation’s average period size.
- Use the charting platform to access the indicator’s edit or properties feature.
- Set the desired number of averaged periods using the options.
Difference Between VWAP and MVWAP
| Indicator | VWAP (Volume-Weighted Average Price) | MVWAP (Moving Volume Weighted Average Price) |
|---|---|---|
| Calculation | Based on volume-weighted calculations performed throughout the day, calculates the average price for the day. | Allows for customization and flexibility by calculating the average of the VWAP values across a defined number of periods. |
| Timeframe | Gives one value for the day, beginning from scratch each day. | Gives a smooth average of the daily VWAP readings. can be changed to suit specific requirements. |
| Application | Useful for intraday analysis and assessing the effectiveness of execution. | Provides a customizable analysis and is appropriate for longer-term traders and tactics. |
| Price Comparison | Allows traders to determine whether the prices at which their trades were performed were better or worse than the daily average. | Does not offer the same details on pricing comparison for execution. |
| Sensitivity | Heavily influenced by early market action because there was a lot of volume right after the market opened. | Gradually less responsive when more periods are averaged, and less sensitive to particular periods. |
| Noise Reduction | Does not automatically reduce market noise. | Can be used to reduce market noise by selecting a longer average window. |
Uses of VWAP and MVWAP
- For short-term traders who concentrate on trades lasting minutes to hours, VWAP is ideal.
- Long-term traders that place trades over days, weeks, or months should use moving VWAP.
- Similar to moving averages or moving average proxies like moving linear regression, moving VWAP functions as a trend-following indicator.
- Integrating moving VWAP can be advantageous for traders who rely on trend-following methods.
- Moving VWAP can also be used by price reversal traders using a crossover technique.
- When a trend crosses over a “slow” average, crossover tactics involve utilizing a “fast” average to determine the trend’s direction.
- When a trend crosses over a “slow” average, crossover tactics involve utilizing a “fast” average to determine the trend’s direction.
- Shorter periods should be applied to these averages to quickly spot price reversals.
- For instance, it is possible to set the “fast” moving VWAP line to 1-3 periods and the slow-moving VWAP line to roughly 5–10 times.
- By ensuring that price fluctuations are caught early, shorter periods enable the timely detection of trend alterations.
- This aids traders in avoiding placing transactions when the majority of the move has already taken place and at less-than-ideal points.
Trading Strategies using VWAP and MVWAP
To learn more about the market, traders can use the VWAP (Volume-Weighted Average Price) and MVWAP (Moving Volume-Weighted Average Price) indicators. The following are some general tactics
Trending Market Strategy
- If the price of a security is over VWAP when it is trending, it may be an excellent intraday selling opportunity.
- On the other hand, if the price is below VWAP, it can be a good time to purchase intraday.
- Traders should be aware of how prices change often and modify their strategy as necessary.
- Traders can watch for purchasing opportunities as price rebounds off VWAP or MVWAP in upward moving markets.
- Selling opportunities can appear as prices move towards the VWAP or MVWAP in markets that are going downward.
Ranging Markets
- For quick trades in range market conditions, traders may want to consider buying when the price crosses above VWAP/MVWAP and selling when it crosses below them.
- Due to the possibility of being trapped in whipsaw movements, it is possible to confirm entry and exit positions using additional indications like support and resistance.
- In the end, a better-than-average purchase price is shown if securities were purchased below VWAP.
- Similar to selling above VWAP, this indicates a higher selling price.
In a Nutshell
- For traders of all stripes, the Volume-Weighted Average Price (VWAP) and Moving Volume-Weighted Average Price (MVWAP) are useful tools that aid in securing the best prices for trades.
- Both VWAP and MVWAP are useful markers, however, they do differ in some ways.
- MVWAP is adaptable and provides value as we move from one day to the next.
- The volume average price for the day is provided by VWAP, which resets every new day.
- MVWAP can be modified to be more responsive to price changes or to smooth data and lower market noise.
- A trader achieves a sale price higher than average if they sell over the daily VWAP.
- Similarly to this, traders who purchase the VWAP get a lesser price than usual.
- If there is a strong trend on a given day, seeking to profit from pullbacks towards the VWAP and MVWAP can be successful.
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Frequently Asked Questions
1.How to Utilize the VWAP Indicator?
When calculating the VWAP, it is important to account for the stock’s high, low, and close prices as well as the total trading volume to use the indicator successfully.
2.How Do Investors Employ the VWAP Indicator in Trading Decisions?
The VWAP indicator is used by investors to direct their purchasing and selling choices. Investors might think about selling a stock if it ends below the indicator, and vice versa.
3.Where is the VWAP Indicator Applicable?
Most intra-day trading decisions are made using the VWAP indicator. For making long-term financial decisions, it is not appropriate.
