Disclaimer: The information's contained in this explanation is the result of my understanding of VWAP and may contain some errors. Search and confirm about it.
Table of contents
1. Introduction
2. What is volume weighted average price?
3. How to calculate VWAP?
4. Why the VWAP is called a cumulative indicator?
Introduction
Technical analysis is an essential part of market analysis and reducing losses/achieving profits, but the main indicator is a Volume where it can be used as a tool to identify potential reversal points and many other strategies.
Volume will not be ideal for confirming a trend so another metric is used that is VWAP which combines the power of volume with price action.
What is volume weighted average price?
volume weighted average price (VWAP) is a trading indicator that gives the average price a security has traded at throughout the day, based on both volume and price. or An average price for a given period weighted by volume.
in Trading chart: Shown as moving average which is represented by single line on trading charts (1 minute, 15 minute, and so on.)
In addition to confirming the prevailing market trend, it shows important areas of liquidity.
Source: https://www.investorsunderground.com/technical-indicators/vwap-volume-weighted-average-price/vwap/
How to calculate VWAP?
You do not need to do a calculation, you will find it included in trading view, but why don't we learn how to calculate it?
Now we move on and how to calculate it in practice and suppose we want to calculate it for 10 minutes:
- calculate the price for the first 10-minute using above equation.
- multiply it with the volume.
- divide the result by the total trading volume up.
Why the VWAP is called a cumulative indicator?
Looking at the above formula, we will find that the price increases by successive additions.
Thus it would be a good standard for price forecasting as a simple strategy for purchasing assets that are below their VWAP line can be relied upon, indicating that they may be undervalued.
If it rises above VWAP it will be a good opportunity to buy and so on.
We note that VWAP is very sensitive to trading volumes and therefore it can be used to define areas of liquidity and it is a good indicator for institutional traders as they can define areas of liquidity and thus determine entry and exit without / with influence on the market.
Sources
Code:
https://www.youtube.com/watch?v=zGKITwDiBGk
https://www.tradingsetupsreview.com/volume-weighted-moving-average-vwma/
https://www.investopedia.com/terms/v/vwap.asp
https://www.youtube.com/watch?v=KvCo7x4A2d0