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What is VWAP? How to trade with VWAP?
What is VWAP
VWAP (The volume-weighted average price) meaning: A trading benchmark used by traders that gives the average price security has traded throughout the day, based on both volume and price. It is important because it provides traders with insight into both the trend and value of the security in crypto trading.
How to trade with VWAP
1) VWAP Pullback
After you understand the meaning of VWAP, let's see a chart. In the BTC/USDT chart below you will notice two lines. The yellow one is the 20-day moving average while the blue one is the Volume Weighted Average Price, which is much slower moving. A strategy that a lot of traders use is to short when prices close below this key indicator and buy when they close above. Another strategy that traders can use is to let the market make a move for the first couple of candles and then wait for a pullback to the VWAP to either get long with the trend or short with the trend, whichever way the market is moving. This is a great area to enter a trade because you know if it closes on the other side of where you got in, then it’s time to get out and move on to the next trade.
2) Fade To VWAP
This is a great contrary strategy that makes figuring out your risk/reward very easy to understand. In the below picture example, we have a perfect example of a Fade to VWAP strategy on the five-minute chart. The BTC/USDT had a nice run-up in the morning and then began to consolidate towards where it failed to make new highs. This is a key indication that the buyers may be drying up and prices are going to reverse. You can also use this strategy match with Bollinger bands to help determine overextended prices. With this strategy we would take a short towards highs with a stop just above and our price target would be, you guessed it, the VWAP! It could be very effective.
This is an easy setup but some key items you want to see happen are a strong run-up with multiple legs and then some hesitation at the top with a failed new high. Once you see this kind of asset price action you can look to take a short position and pay yourself for your patience.
Key Takeaways
- The volume-weighted average price (VWAP) appears as a single line on intraday charts (1 minute, 15 minutes, and so on) in crypto trading, similar to how a moving average looks.
- Retail and professional traders may use the VWAP as part of their crypto trading rules for determining intraday trends.