# VWAP indicator – alternative to moving averages

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Moving averages are one of the most popular basic technical analysis tools. More than 10 of their variations are known: EMA, LWMA, etc. All of them, in one way or another, use the same principle of data averaging, the differences in the coefficients applied to each period. The VWAP indicator is also an analogue of a moving one, characterized in that period values are weighted by trading volumes. This makes it possible to see a more realistic picture, in contrast to what the moving averages show.

## Advantages and disadvantages of the VWAP indicator

Let us briefly recall the principle of calculating a simple moving average (and the rules for their application) – the arithmetic mean. If there are three last candles with closing prices (you can choose a different price) “5”, “3”, “8”, then the simple moving average will be (5 + 2 + 8) / 3 = 5.

Now let’s imagine that we are on the market. The seller offers 100 apples at the price of 5 euros / pc and 1 pear at the price of 50 euros / pc. If we were guided by the formula for calculating moving averages, then the average price should have been (5 + 50) / 2 = 27.5. Moreover, this price would be regardless of how many apples or pears there are. But, you see, this somehow does not quite accurately reflect the real average price. It would be more correct to take into account the quantity of goods sold as well. And then the formula would look like this: (5 * 100 + 1 * 50) / 101 = 5.44 euros. That is, in this case, one single pear would not have a dramatic effect on the average price.

**Indicator ****Volume ****Weighted ****Average ****Price (****VWAP) **– a technical analysis tool, in which the price of each period is weighted by the trading volumes of the same period. If on a 5-minute interval on one candlestick within 5 minutes the trading volumes were conventionally $ 1 million, and on the second – $ 10,000, then the influence of the second candlestick on the indicator value will be minimal.

**Features:**** indicator**** VWAP:**

- VWAP is a trend indicator that works on the same principle as moving ones.
- VWAP shows the level of liquidity. The larger the volumes for a particular period, the more liquidity in this area. Accordingly, a decrease in the indicator value indicates a decrease in liquidity – either a flat comes, or traders temporarily close open deals.
- VWAP has a minimum of settings and is a confirmation indicator for trending strategies.

The VWAP indicator could be an excellent tool for technical analysis, if not for one question: where to get data on volumes? For a separate broker, this is tick data that is far from the real market volume, which distorts the final result so much that it is easier to use classic moving averages. There are few alternatives, but they are:

- Use the VWAP indicator for equity markets only. МТ4 and МТ5 provide the ability to connect to data on volumes on the Globex platform (CME, Chicago Exchange). True, on a paid basis.
- Buy paid packages and subscriptions from the developers of the respective services and platforms. For example, ClusterDelta, ATAS (ATAS) or Volfix.
- Install free versions of the indicator with reduced capabilities.

There are free versions of the VWAP indicator, but they have limited settings (up to 3-4 parameters). Since the given volumes at almost the same quotes are different for each broker, accordingly, VWAP will draw different lines on different platforms. From a professional point of view, this is unacceptable. But on the other hand, if you use VWAP as a confirmation signal, you can “adjust” to its graph by finding patterns.

Indicator signals are interpreted separately for long-term and short-term trends. In the preliminary analysis, the long-term trend is first assessed: if VWAP is below the price line for a long time (this is best seen on the line chart) – the trend is upward, above it is the downtrend.

In the short term, the logic is somewhat different. If the current price is below the VWAP, it means that the asset can now be bought at a better than the market average price. True, there is no guarantee that the price will not continue to go down, so the strategy should be based on the main trend indicator, where VWAP will be an additional tool.

If the VWAP indicator crosses the price several times, the market is flat.

The white line is the VWAP indicator. The yellow rectangles mark the flat zones, the blue ones indicate the uptrend, the green ones the downtrend.

**Output**… The VWAP indicator is interesting for those who work with large volumes of transactions in the stock market with access directly to the US stock exchanges, from where VWAP will pull up the initial data. Also, this indicator will be useful for those who work with special paid packages of tools from analytical software developers. Whether it is worth using its free version for an ordinary trader is a rhetorical question. We are ready to send you a template for several such versions for MT4 and we will be glad if you share your opinion about this indicator in the comments!

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