VWAP indicator - we connect the power of volumes to the analysis
Good afternoon, dear forex traders!
In this review, I want to introduce you to the VWAP indicator, which is used by large market participants in their trading. Yes, you read it right. It is really used by large market participants instead of the obsolete Moving Average and their derivatives: VWAP is the basis of many corporate intraday and intraday trading strategies. Read on to learn the secrets of using the VWAP indicator on Forex.
Platform: MetaTrader 4/5
Currency pairs: EURUSD, GBPUSD, AUDUSD, USDCHF, USDJPY, USDCAD, NZDUSD, USDMXN, USDRUB. Indices, commodities, metals are also available.
Trading time: GMT + 2 01: 00: 00-23: 59: 59: 59. Also, the indicator does not work during the weekend on the Chicago Mercantile Exchange
Recommended Brokers: Alpari, RoboForex, Amarkets
What is VWAP?
The VWAP indicator (Volume Weighted Average Price) is the weighted average volume price.
The formula for calculating it is quite simple:
It can be seen from the formula that VWAP is the summed sum of the products of volumes by the price for the considered time period, divided by the total amount of volume for the considered time period.
At first glance, VWAP is similar to the usual Moving Average. But he has some extremely important differences.
First difference - This is the basis of the calculation. In the case of VWAP calculation, the base is not only and not so much the price as the volume traded on the GLOBEX exchange in price and time. This means greater responsiveness of the indicator to changes in the market. Especially if they are not visible on the usual price chart. That is why professional VWAP is paid, because it is necessary to configure the GLOBEX paid exchange gateway in the MT4 / 5 terminal; free versions of this indicator use tick volumes of a specific broker, which not only differ among different DCs, but also have little to do with what is happening on the futures exchange. And this reduces the prognostic value of the indicator, although in this case, if interpreted correctly, it will work better than moving averages.
Second difference - This is a feature of calculating the VWAP indicator. It has a beginning and an end, while the Moving Average, by and large, has no beginning or end. The VWAP indicator is calculated from the beginning of a given period (for example, hour, day, week) to the end moment in cumulative mode. The data is not averaged. Those. an important feature of the indicator is the choice of the calculation period (timeframe). Weekly VWAP is built Monday through Friday. Daily VWAP - from 01:00 to 23:59 daily, according to the terminal time. Why not from 00:00, you ask? Because the indicator takes data from the exchange, and on the exchange from 16:00 to 16:59 Chicago time (00: 00-00: 59 UTC + 2) - a break.
I’ll clarify that most brokers have UTC + 2; if your broker offers a different time, then you can set the correct time in the indicator settings. Thus, despite the timeframe, in the working window (at least M1) - your VWAP will remain the same as you set it: weekly, daily or hourly. In the figure below, M15 and M1 are CL oil graphs. VWAP indicator selected by CME (Chicago Mercantile Exchange) session. It was at this time that the main volumes on the exchange for this brand were held, which means that the session VWAP is working on this tool.
Personally, I use monthly, weekly and daily VWAP on EURUSD. I add hourly on GBPUSD, and add session (CME) and hourly on oil, because These instruments are characterized by high volatility.
Third difference - the ability to build VWAP series. In fact, the ability to build series is a consequence of the fact that the indicator is built on a timeframe: hourly, session, daily, weekly. The example below shows a EURUSD chart of 2 daily VWAP series. The VWAP series allows you to find the best opportunities to enter the market, as there are already guidelines not only for the current, but also for past activity.
It is clearly seen that the previous average VWAP acted as support at the very beginning of the day. At this time, the current daily VWAP has not yet been revealed, and the price was at -6 deviation. It was the support on the average of the last day that allowed us to buy more confidently in this place, although the quote was in the sell zone as part of this day.
Fourth difference - the ability to use end-to-end analysis to find the best entry point. Cross-cutting analysis is the analysis of quotes from the upper timeframe to the lower and vice versa. Naturally, indicators need to be analyzed in the same way. The VWAP indicator provides the best opportunity for this. For example, on CL oil, I use a series of 2-3 weekly VWAPs, 3-5 daily VWAPs, and 3-5 session VWAPs. In some cases, I switch to a series of 3-5 hourly VWAPs. This allows you to navigate the market not only here and now, but also to understand its general mood.
The chart below shows a pair of AUDUSD and three VWAP charts: a series of New York sessions, a series of daily and weekly. It is clearly seen that the quote broke through the average weekly VWAP, i.e. moved to the sell zone. It struck with impulse, although before that I relied on it. Daily VWAP shows that all day the price went in the range between +2 and -2 deviations of VWAP. On the NYSE VWAP it is clear that it was the Americans who sent the currency knocked down. The sum of these facts suggests that we should expect a continuation of the downward trend.
How to interpret the VWAP indicator
There are several ways to analyze VWAP. But before you consider them, you need to understand what a weighted average price is. This is the price that separates the buyers and sellers of the asset in the reporting period. The farther the current price is from the average VWAP, the stronger the pressure of one of the parties is: if the price is below the average VWAP, then sellers prevail, and if it is higher, then buyers prevail. In order to better navigate the market, it is necessary to use the VWAP quadratic deviations: + -1, + -2, + -4, + -6 and + -8 deviations, where “+” and “-” are higher or lower average, and the figure is the number of deviations. You have already seen them in the examples above, but I did not reveal their essence. I must say right away that I do not use the + -1 deviation in trading, for the simple reason that the deals there are the weakest.
In most reviews of the VWAP indicator, it is written that there are two strategies for its use in trading: trend and return. The first involves entering into purchases after intersections of the average VWAP from the bottom up and sales - after the intersection of the average from the top down. The second strategy is the opposite: search for sales at the intersection of the middle from the bottom up and purchases at the intersection of the middle from the top down.
In fact, everything is a little more complicated. After all, nowhere is it written how to determine which strategy to use in a particular situation? In order to choose a trend or return trading strategy according to the VWAP indicator, it is necessary to clearly distinguish between the impulse phase and the consolidation phase on the higher (daily and weekly) time frames. The EURUSD chart below shows the entry points for the trending strategy. The price is always above the average VWAP, i.e. it is from her that it is reasonable to seek purchases. In this case, SL should be set below -1 / -2 deviations, and TP - by + 4 / + 6 deviations or for the previous extremum.
If the quotation has been in the consolidation phase for a long time, then the optimal solution would be to use a return strategy at the extreme borders of the consolidation zone.
On the weekly AUDUSD chart (from the previous example), it can be seen that the price stood in one place for a long time, and VWAP did not move. This allowed you to enter sales at +6 deviation and close profits at -6 deviation of VWAP. After setting the indicator, you will see for yourself that the return strategy is the most optimal in the consolidation phase. Extreme deviations indicate reachable boundaries in the corridor.
The algorithm for selecting a return strategy (for example, EURUSD and CL):
- We open the VWAP chart. We evaluate the opening of the market relative to the levels of the past VWAP: weekly to weekly, daily to daily, as well as the relationship of daily to weekly;
- If the market in the previous settlement period closed near + -4 or + -6 deviations from the average VWAP, then in the new settlement period it is necessary to look for the opportunity to enter the counter-trend trade when the average VWAP of the previous period is reached. If the market in the previous billing period VWAP closed in the positive zone, then we will look for purchases, and if in the negative, then for sales;
- Within the current billing period, VWAP needs to enter against the current movement at + -2-4 deviations (the market is falling, we are buying; the market is growing - we are selling). Naturally, deviations of the current period should more or less coincide with the average of the past VWAP billing period;
- Entrance against the main current movement must be confirmed on lower timeframes.
As an example of applying the return strategy, I propose once again to consider the EURUSD chart with daily VWAPs. In the morning we went below the average VWAP - -6 deviation. This is an extreme deviation from which a return is likely on its own. But we know that here is the average VWAP of the previous day, as well as the weekly average (see the figure above). This means that, in general, the market is determined to buy, and at the moment it is testing buyers for strength. Therefore, we buy -6 the deviation of the current billing period, and put the stop at -1 / -2 deviation of the previous billing period. Profit - by + 4 / + 6 deviation.
Another option for work on a return strategy is as follows. It is necessary to wait until the market reaches + -8 deviation Vwap or further and try to work against the movement. Let not to medium Vwapbut up to + -4 deviations are possible. This is a risky strategy, but thanks to it you can catch interesting kickbacks. The main thing is not to get into the impulsive phase of the market on the higher timeframe: in this case, a return to the average Vwap may not be very long.
The algorithm for choosing a trend strategy (for example, GOLD):
- We open the VWAP chart. We evaluate the opening of the market relative to the levels of the past VWAP: weekly to weekly, daily to daily, as well as the relationship of daily to weekly;
- We are waiting for consolidation above (in the case of buy dynamics) or lower (in the case of sell dynamics) the average VWAP of the current settlement period (it is better if the average from the very beginning of the settlement period is below the market);
- This consolidation should also be higher (in the case of buy dynamics) or lower (in the case of sell dynamics) average, or even better + -2 deviations of the previous period;
- If the market is in a pulsed phase on the higher timeframe, then on the lower timeframes, you should enter the trend on average or + -2-4 deviations from the average. The main condition in the trend: being below or above the average VWAP of a higher timeframe. Here is an example of a trending day on gold, when you had to enter from +2 deviations, because quotation did not fit the average VWAP. A little earlier there was a classic entry from the average VWAP;
- If the price breaks through the average VWAP, but is traded in the region of the average VWAP and not further than + -2 deviations, then you can also try the trending strategy. This is clearly visible in the figure. After the impulse on the first day, the price continued its upward trend, but it was already an upward balance, because the average was broken down, but the day closed at +4 deviation.
In the case of working according to the trend strategy TP we put on 8 deviations and hold the deal until the end of the session. SL is either below the average of the current TF, or already for 1 or even 2 deviations, because they often follow the feet, especially on daytime TF.
As a short summary of this section, I add the following philosophical remark. Most deals are both returnable and trendy at the same time: depending on what angle the market is viewed from. Inside the hour it can be a reversal, and inside the week - a trend. The main thing is to be able to correctly understand the current direction. That is why point 1 in both strategies is an analysis of several settlement periods, as well as a comparison of different settlement periods. This avoids unnecessary risks.
How to determine a trend change by VWAP
At the time of a trend change, it is easy enough to make a mistake with the direction. The explanation for this is simple. All previous distributions of the VWAP series (and any other indicator) show a certain direction. At the initial stage of a trend change, there is always a desire to open a position on a previous trend. How to identify potential scrap? One of the fairly reliable methods is as follows. If there is a breakdown of the current average daily VWAP, and then weekly, then the trend work should be canceled, even if the market starts its usual movement before that. In the near future, the market will either turn around or enter the balance phase, i.e. outset. And these are completely different risks and strategies.
A very important point in the potential change of trend: a constant breakdown of several average daily VWAPs against the main movement during the week. Here is the EURUSD chart. Two days there is a deep breakdown of the average daily VWAP, although the price, in general, is growing. On the third day, an attempt to grow ends in a price collapse. Moreover, the collapse was from +6 VWAP deviation and -6 VWAP deviation below the levels of the previous day. This puts a big question mark on the future of upward momentum.
Additional examples of work using VWAP
The figure below shows the EURUSD chart with the loaded weekly VWAP.
- Entry into sales (return strategy). The price came on Tuesday in the zone of +6 deviation. As you can see, this same place was +6 VWAP deviation in the previous week, i.e. upper border of the flat. It would be possible to exit on the average VWAP if the price were delayed there. And so almost immediately she went in the direction of -4 and -6 deviations of VWAP, where it was necessary to exit the market. Stop for the maximum of the previous week;
- Entrance to purchases (return strategy). The pair stands at -4 VWAP deviation until Thursday. This is also the -2 weekly VWAP deviation. Stop at a local minimum. Profit in the area of average or + 4 / + 6 deviations of VWAP;
- Entrance to purchases (trending strategy). The currency pair is half a Friday on the average weekly VWAP after a rollback from +6 VWAP deviation. Unwillingness to go below indicates the continuation of the upward trend. Exit at +6 deviation;
- Entry into sales (trending strategy). The market opened on Monday in buy, but it sharply changes the mood and goes below the new average VWAP, which indicates the potential for sales. At the same time, a return to the average occurs during the American session, which allows you to enter into a perfect deal;
- Entrance to purchases (return strategy). The market closes on Monday in the region of the average VWAP last week. The purchase is dangerous, but we should expect a return to the average VWAP of the current period, as very little volume was collected. This is what happens;
- Entry into sales (trending strategy). Selling from an average weekly VWAP on Tuesday. An exit on -6 a deviation since in the future, there is a high probability of another return to the middle one.
The following figure shows the EURUSD chart with the daily VWAP loaded. The situations are the same as above, but taking into account the intraday dynamics.
- Entrance to purchases (trending strategy, No. 3 in the previous example). On Thursday, the market departure in buy impulse. After this, on Friday consolidation takes place in the region of average VWAP Thursday. In this case, the pair walks within the boundaries of VWAP until the release of significant market news. Price behavior and positioning clearly indicated how the market would behave;
- Entry into sales (trending strategy; No. 5 in the previous example). There is a breakdown of upward dynamics on Monday. On the retest of the average daily VWAP, which coincides with a +6 deviation on Friday, you can enter the sales. I think everyone noticed that on a daily VWAP it is a trending strategy, while on a weekly VWAP it is a return strategy. This is due to different timeframes, and therefore with different positioning;
- Entry into sales (trending strategy; No. 6 in the previous example). In fact, a similar explanation. The only average VWAP test on Monday is taking place. The previous upward trend is weak: it goes between the average VWAP and +2 deviation of VWAP.
Before setting the indicator, I recommend returning to the beginning of the article and analyzing the last 6.5 weeks on the GBPUSD pair in the light of the knowledge gained.
Most authors refer to the disadvantages of the VWAP indicator as a certain lag, which increases with time, due to the accumulation of a large amount of data. Those. the indicator, closer to the end of the calculation period, becomes insensitive to new data. On the one hand, this is true.
But let's figure it out. The accumulated data allows you to see the real fair price for a given period. And finding quotes relative to this price shows the mood of market participants.
The most reliable transactions relative to the average are carried out in the first half of the period. But in the second half of the indicator period, return strategies work well.
The indicator settings look like this:
The following description is taken from the developer's site with my comments (in bold italics).
- Instrument (the default value is “AUTO”) - since many dealing centers (DCs) on the same instruments can use different futures names, this parameter allows you to specify the name of the futures from which the data will be imported. With the value “AUTO”, the server tries to recognize the necessary futures by analyzing the name of the instrument from the trading center.
For example, some forex brokers offer oil trading. Wtiwhile most others have oil CL, i.e. the same ticker as on the exchange. Have your broker eat oil Wti, then in the indicator settings you need to set a ticker CL.
- Update_in_sec - indicator update time in seconds. Two modes are available: Every_1min (update once a minute) and Every_5min (update 1 time in 5 minutes).
A one minute update is preferablee.
- MetaTrader_GMT - (the default value is “AUTO”) - since each DC personally configures the data server for the correct display of data in the indicator, you must specify the time zone of the DC server. Unfortunately, there are no built-in methods for determining this parameter; therefore, in AUTO mode, the server compares the time of the last quote on the client.
You can read more about time settings here.
- VWAP_Period (the default value is “Daily”) - the type of chart described in the comment. Different variables are involved or not involved in the construction depending on the type of type. Before describing the possible options for this parameter, it is worth noting that the indicator can build not one chart, but a series with the specified time parameters. The number of profiles is determined by the variable Amount_of_vwap.
Possible Values VWAP_Period:
- Custom_Period - user mode, VWAP schedule will be built for the period specified in the parameters Custom_Start_time, Custom_End_time (really does not work);
- per_Hour - VWAP schedules will be built every hour;
- Daily - VWAP schedules will be built in a day. The beginning of the day (conditionally) is the start of trading after a technological break on the exchange;
- Weekly - VWAP charts will be built a week from Monday from the beginning of the day to the end of trading on Friday;
- per_Asia - VWAP schedules will be built for the Asian session (00:00 - 09:00 GMT + 2);
- per_Europe - VWAP schedules will be built for the European session (09:00 - 15:00 GMT + 2);
- per_NYSE - VWAP schedules will be built for the American session (15:00 - 24:00 GMT + 2);
- per_CME - VWAP charts will be built for the US session of the Chicago Stock Exchange (16:30 - 23:30 GMT + 2);
- per_Contract - VWAP schedules will be built for the entire available contract (really does not work).
- Amount_of_vwap (default value is “1”) - the number of VWAP schedules in the series. In order to optimize the load, the maximum value is 30. Really works without failures up to 5 schedules. Maybe a little more. The longer the series, the more failures in the construction;
- Forex_auto_shift (the default value is “true”) - if true, the indicator automatically determines the offset between the futures and forex.
Between forex quotes and stock quotes, there is a so-called forward, i.e. price difference. On the euro, it changes from 80-90 points (4 digits) at the time of the official start of trading in the new quarterly futures, to 2-3 points at the time of expiration. The indicator is configured in such a way as to take this feature into account, but sometimes you can observe its shift on the chart just by the value Forex_shift. To solve this problem, you need to update the chart or change the timeframe (instead of M5, put M15). Most often, the problem occurs when building series Vwap.
- Forex_shift - the number of points by which the chart will shift up or down if the Forex_auto_shift parameter is false. The variable can be either more or less than zero. Designed to take into account forward points (the difference between the price of futures and spot);
- Custom_Period_Settings (the default value is “- Settings for Custom Period“) - this is a text comment, it does not affect the indicator in any way;
- Get_Custom_Period_from_Chart (the default value is “true”) - with the VWAP_Period = Custom_Period parameter, the indicator will receive data for the Custom_Start_Time and Custom_End_Time fields directly from the vertical lines placed on the chart (and available for free movement by the user);
- Custom_Start_time (the default value is “2017.01.01 00:00”) - if Custom_Start_Time and Custom_End_Time are different from the values “2017.01.01 00:00 'and Get_Custom_Period_from_Chart =" false "- the server will load the history of the period indicated by these parameters;
- Custom_End_time (the default value is "2017.01.01 00:00") - see Custom_Start_Time;
- Deviation_settings (the default value is “- Deviation_Channels”) - this is a text comment, it does not affect the indicator in any way;
- numDev1 (default value is “1”) - coefficient for constructing the first channel;
- numDev2 (default value is “-1”) - coefficient for building the first channel;
- numDev3 (default value is “2”) - coefficient for constructing the second channel;
- numDev4 (default value is “-2”) - coefficient for constructing the second channel;
- numDev5 (default value is “3”) - coefficient for constructing the third channel;
- numDev6 (default value is “-3”) - coefficient for building the third channel.
Let me remind you that I prefer + -2, + -4, + -6 and + -8 deviations. Due to the fact that this indicator allows you to configure only 6 deviation values (three above average and three below average), I proceed as follows. The default setting is + -2, + -4, + -6. If the price comes to + -6 deviation Vwap, and there are no signs of rebound, then I change some value to + -8 and get the next potential target. Also, with directional movement, I set + -1 deviation, because they may not be suitable for the middle one, but this does not happen so often.
- Reverse reverse (the default value “- Reverse for USD / XXX symbols -“) is a text comment, it does not affect the indicator in any way;
- Reversechart (the default value is “false”) - for reverse pairs, the package (except for USDJPY, USDCAD, USDCHF) must be set to “true” so that these indicators “turn upside down” and correspond to the pair chart.
On futures exchanges, the dollar is always in second position, i.e. futures 6S (franc) is CHFUSD, but not USDCHF. Therefore, for proper construction, it is necessary to expand the indicator, which happens when this setting is turned on.
- DO_NOT_SET_ReverseChart (the default value “... for USDJPY, USDCAD, USDCHF -“) is a text comment, it does not affect the indicator in any way, the comment itself gives a hint that there is no need to set the ReverseChart parameter for such pairs as USDJPY, USDCAD, USDCHF, so as an indicator, it will recognize them and turn the data over if necessary.
Where to download / find the VWAP indicator for MetaTrader 4/5?
VWAP indicator is built-in in all volume-oriented exchange terminals (NinjaTrader, VolFix, etc.).
As for MetaTrader, in order to use VWAP, you need to find and install it. Free and some paid options for the VWAP indicator can be found at this link. The choice is huge, it’s up to you to install and start using it.
Personally, I use the ClusterDelta paid indicator package, which includes the VWAP indicator.
The cost of subscribing to all indicators ranges from 4.40 (Standart version, 9 indicators) to 7.50 (Premium version, 14 indicators) $ per month. The difference between the regular and premium versions is the speed of importing data from the exchange. Despite numerous shortcomings, this is the best package of exchange indicators for MT4 / 5: they have a gateway configured on the CME server. Hence, some hangs and so on, but it's worth it.
For VWAP and other indicators to work, you must be authorized on their server. There are three authorization methods:
- Log in to one of the sites //clusterdelta.com, //my.clusterdelta.com or //forum.clusterdelta.com as a registered user;
- enter the special program: ClusterDelta Authorizer;
- Log into the ClusterDelta Online platform terminal.
The indicator setting is normal. First you need to download the archive. After that, unzip the Indicators and Library folders to the MQL4 folder of your Metatrader 4 or copy the Indicators and Library folders to the MQL5 folder of your Metatrader 5.
To find the MQL4 folder, launch Metatrader 4 and select "File" -> "Open Data Directory" and then enter the MQL4 folder. To find the MQL5 folder, launch Metatrader 5 and select "File" -> "Open Data Directory".
After the indicator appears, do not forget to allow the import of the DLL, otherwise nothing will work.
Detailed basic instructions:
- How to install the indicator in Metatrader 4;
- How to install the indicator in Metatrader 5.
Based on the VWAP indicator, it is possible to build a successful trading system. Thanks to him, you can enter the market and set TP / SL levels. VWAP is not a Grail, but on its basis it is possible to build a strategy with a positive mathematical expectation - and this is precisely the ultimate goal of Forex trading.
And the most important conclusion. VWAP will show that the market is near the equilibrium price or far from it within a certain period. And the farther from the equilibrium price within the period, the greater the chances of the completion of the trend within the period. This understanding will allow you to abandon unnecessary transactions and make the necessary transactions.