How to Use the VWAP Indicator in MT4

In this article you will learn how it works, how to calculate the VWAP value and most importantly how to use the VWAP indicator.

In this article you will learn how it works, how to calculate the VWAP value and most importantly how to use the VWAP indicator.

When trading Forex, indicators are valuable technical analysis tools that show you how the market is trending and allow you to time your market entries and exits more accurately.

The thing is, when using indicators, you need to know and understand how they work and what they show. That way, you will be able to better interpret your signals.

With that in mind, we will now look at the indicator Weighted Average Price VWAP (is a moving average weighted by the financial volume of an asset's trades) in MT4 in more detail.

What is the volume-weighted average price (VWAP) indicator?

VWAP is an advanced technical indicator that shows the average price at which an asset was traded over a specific time period, but the price is weighted by volume.

Let's explain this in a little more detail. Let's say you look at the EUR/USD currency pair on a chart with an hourly time frame.

Now, let's say the pair has closing prices of 1,100, 1,200, 1,110, 1,210, 1,115 at the end of each of the previous 5 hours.

Now, if we use a simple moving average indicator on these 5 timeframes, it will show us that the average price on the 5 hours was 1,147.

Now, if we use the VWAP calculator, it will calculate the average price, weighted by volume.

That is, despite these closing prices, if the pair trades at or near 1,110 most of the time, the VWAP indicator will show an average price closer to that value, much lower than the average price indicated by the simple moving average indicator.

Some traders believe that since the VWAP indicator provides information about the price and volume of an asset, it is a more accurate indicator to reflect price action.

How to calculate VWAP?

Fortunately, when adding the VWAP indicator to a chart, you don't have to calculate it yourself. However, it is important to understand how the indicator works, knowing how to calculate it is valuable.

To calculate the volume-weighted average price of an asset, you will need to multiply the price at which the asset was traded for a specific period of time by the volume that was traded, and then divide that number by the total volume traded.

To better illustrate the concept, let's look at a simple example:

Let's assume you are looking at the 1-hour price chart for a specific asset.

Based on the formula above, you will need to calculate the asset price for the first 1 hour period. To do this, you will add the high, low and closing prices for the period and then divide by 3.

You will then multiply that number by the volume traded to arrive at a number that we will call it PV number.

You will then divide the PV number by the total volume to arrive at the VWAP. This means that for the first period, the VWAP will basically be the average price at which the asset was traded.

For the following periods, you will do the same. In other words, you will calculate the average price of the asset for the period and multiply it by the volume for the period.

Then you will add that number to PV numbers previous years that you calculated to arrive at a cumulative value.

Once calculated, you will divide this by the total volume. In other words, you will divide the amount by the total volume of all periods. This will allow you to calculate the VWAP over time.

Simple Moving Average vs VWAP — What's the Difference?

As mentioned in our definition and example above, VWAP is calculated as the price of an asset in a period multiplied by the period's volume divided by the total volume.

In contrast, a simple moving average is just calculating the average price of an asset for a specific period.

It is calculated by adding the closing prices of the asset for each of the periods and then dividing by the number of periods.

As mentioned earlier, one of the main benefits of VWAP over a simple moving average indicator is that it provides a more accurate reflection of the average price of an asset.

VWAP signals

Now that we've seen what the VWAP indicator is and how its value is calculated, let's look at some simple signals you can use when using VWAP when trading.

Keep in mind though that these are just a few simple examples and there are many other strategies where you can use the VWAP indicator.

Buy Signals

A trend is considered to be bullish when the weekly (red) line is above the monthly (green) line. You should only look for trading opportunities in the direction of the underlying trend. In this case, for purchase.

While VWAP does not provide super-accurate entry points, a good practice is to look for them when the price is below the daily (yellow) line and/or close to the weekly (red) line.

You can support your decisions with some good and accurate entry point indicators like the MBFX Timing

In this article you will learn how it works, how to calculate the VWAP value and most importantly how to use the VWAP indicator.

Buy Signal Example

sale signals

A trend is considered bearish when the weekly (red) line falls below the monthly (green) line. You should only look for trading opportunities in the direction of the underlying trend.

In this case, for sales negotiations. While VWAP does not provide super-accurate entry points, a good practice is to look for them when the price is above the daily (yellow) line and/or close to the weekly (red) line.

 

In this article you will learn how it works, how to calculate the VWAP value and most importantly how to use the VWAP indicator.

Sale signal example

Support and Resistance Signals

The VWAP line can be a strong indicator of support and resistance. Therefore, if the price stays below the VWAP line but does not break it for several periods, it could indicate resistance.

Likewise, if the price stays just above the VWAP line and doesn't dip below it, it could indicate that the price has found support.

How to use VWAP indicator in your trading strategy?

There are several ways to use the VWAP indicator in your trading strategy.

You can, for example, use it alone to provide buy and sell signals as described above.

Here, another example would be when the asset price goes far beyond the VWAP on both sides.

This could mean that the asset is overbought or oversold, which in turn could signal a reversal.

For example, if the price is way above the VWAP line, it can be overbought and traders can start selling.

The opposite is true if the price goes far below the VWAP line. Here, it can signal that traders may go long.

VWAP indicator in the Petrobras Chart

VWAP indicator in the Petrobras Chart

How to configure VWAP indicator in MT4?

After downloading the indicator, you can install it. Here, the process also differs depending on where you downloaded the indicator. If you installed the indicator using the MT4 Market, you can install it from the Market itself. If you download here on the site, follow the steps below:

download for free

In the folder will come the following MT4/MT5 indicators:

  • anchored vwap
  • v-wap
  • vwap-bands
  • v-wap-close
  • v-wap custom
  • vwap oscillator
  • vwap plus

After downloading it from the website, you will need to go to the File menu in MT4 and select Open Data Folder.

You will then double click on MQL4 and then on Indicators. Then you will copy the downloaded file to this folder.

You can restart the MT4 platform and navigate to the MT4 browser where you will find the indicator you downloaded and then double click on it to open it.

Once opened, you will be able to adjust the indicator settings.

Here it is important to remember that this will be different based on the indicator you have installed, but generally you will be able to change the VWAP line colors and the period you want to use for the VWAP calculations.

After selecting the period, the VWAP indicator will calculate the volume weighted average price for the specified period.

Summary about the VWAP indicator

The VWAP indicator is worth adding to your trading collection, but remember to have realistic expectations.

Just like any other technical analysis tool, it is not capable of providing accurate signals 100% of the time.

So, this Forex indicator gives false signals occasionally. Its performance will vary significantly depending on market conditions.

Feel free to develop your own trading system based on this indicator.

Is VWAP suitable for swing trading?
The VWAP indicator tends to work well for swing trading.
Is the VWAP indicator for MT4 free?
There are several free VWAP options that you can choose from on MT4 or download here on the site.
What are the optimal timeframes for using VWAP?
Generally, VWAP works well on short to medium timeframes such as day trading and swing trading. Keep in mind, though, that how you use it ultimately depends on your trading strategy.

 

5 / 5 - (7 votes)

Related Posts

error: