VWAP Bands and How It Can Enhance Trading
There is an enormous number of technical Indicators available for traders with suited to varying trading techniques. It could be compared to the sea of Indicators for a trader to choose from for trading. In a bid to maximize profits, traders apply technical indicators in their trades. Furthermore, traders combine Indicators with others so to strengthen their trading skills and styles. VWAP Bands is a technical indicator. It is magnificent in determining the market direction and directing the trader on the best position possible to take.
They also have the potential to provide exit and entry signals just like a forex buy sell indicator. Usually, it is used for swing trading, intraday trading and day trading with any forex or stock trading techniques for additional confirmation of trading positions.
What are the VWAP Bands?
VWAP stands for Volume Weighted Average Price (VWAP). They have resemblances with a moving average, as it shows how the average price changes with time. Nevertheless, it comprises a weighting for traded volume, which means heftier trading activity has a superior influence on its direction. Lower volume periods will move the VWAP lower than higher volume periods.
The VWAP Indicator is of immense importance in the industry. With been helpful to Institutional Investors in establishing what “fair value” is for a particular day. While using this indicator, investors will endeavor to buy or sell at a price very close to the VWAP to obtain “good value” fills for their clientele. Obviously, the markets respond to the VWAP.
Typically, in a bearish market for most of the day, which stays below the VWAP. As the market makes for the VWAP line, heavy selling is noticed. As a result of Institutional Investors, who are eyeing to go short or exiting long positions.
VWAP Bands assists traders in getting an indication of the direction of the market. When the market is bearish, it will likely stay below VWAP and the other way round when bullish.
When the direction of the market is sideways, it will fluctuate below and above VWAP. This situation would suggest selling above and buying below the VWAP. Trading in a ranging market with this method could be a bit tricky as against a trending one. If the market moves sideways, it is at times difficult to decide how far the VWAP market will move before returning to a trending direction. Never forget to watch out for breakouts in this pattern of movement. If you want to get the most out off this indicator you can test it together with the gold indicator MT4.
See in the chart below, where the Indicator is used to identify a trending market:
VWAP is calculated for every day, starting from the time that markets resume to the time they close. Hence, the calculation makes use of Intraday data. The formula for calculating VWAP goes thus:
Volume-weighted average price = typical price x volume/cumulative volume
The first step is to obtain the typical market price for the stock—it is the average of high price, low price, and the closing market price of the stock for a particular day. Applying the formula: [(H+L+C)/3], For example, if H = 40, L = 30 and C = 36, then the stock’s average price would look like this:
Average Price = (42+32+38) / 3 = 37.33
Next step is to multiply the usual price by the volume. When V = 20, then: 37.33 * 20 = 746.6
The running overall of the volume is collected throughout the day to obtain the cumulative volume. Cumulative volume, from our example= 78
Therefore, applying the VWAP formula above:
VWAP = 746.6 / 78 = 9.57
VWAP can be calculated for all periods to display the VWAP for all data points in the Stock chart. By trading software, this is done automatically. Hence, the trader only ought to specify the required number of periods to be worked on in the VWAP calculation.
VWAP standard deviation bands
With the use of a mathematical formula to decide VWAP deviations, creating extra indicators is quite possible. It could be of help in deciding market movements. The real way to create it is dependent on a trader’s charting package.
As in the case of many technical top 10 mt4 indicators, regular learning and practice are advised to see how the indicator suits with a chosen market. In a downtrend, the zone around the Indicator would be an excellent selling zone.
There are no easy ways around it. Since the market can swing to any direction at any period of the day. Nevertheless, through regular study of the market interaction with the Indicator, a trader can understand the price-action behaviors of the market.
Importance of VWAP
The VWAP indicator represents the actual average price of the market. And does not impact on the closing price. Calculation of the Indicator is based on historical figures. Hence, it is a better fit for intraday trading.
It is popular among traders as it can adequately indicate if a market is bearish or bullish. And whether the time is right for buying or selling. In some quarters, it is considered a better tool than moving averages.
Application of VWAP Indicator
Application of the Indicator in trading during short-term timeframes is quite simple and effective. A common strategy for trading bullish is to hold on for a clear VWAP cross above, then take a long position if the price breaks above VWAP, the earlier time frame’s VWAP can be adjudged a support level.
The Indicator can be applied in combination with Bollinger bands.
Downloading and Installing VWAP Indicator
Its software displays VWAP Bands in the main chart window. The software of the Indicator can be downloaded and installed for use on MT4 Trading platform. It is achievable on the internet free of charge.
Steps for downloading and Installing the Indicator on MT4 Trading platform:
1. Download the Indicator software and extract it.
2. Go to “File menu” on Meta Trader 4 and Click “open data folder”.
3. Go ahead and open the Mq4 folder and copy the Indicator’s folder.
4. Paste the copied items; VWAP Indicator mq4 and VWAP Indicator .ex4 into the Indicator’s folder.
5. Now, restart the MT4 Platform.
Conclusion Of VWAP Bands
VWAP Bands is a Technical Indicator. With features similar to the moving average. It can detect the direction of the market and signal position-taking. And is excellent under short time frames and still functions adequately in longer time frames. It assists investors in deciding whether to assume a passive or active approach. Or whether to exit or enter the market.
Furthermore, the VWAP can also assist investors in taking the right trade position at the right time. But it is must to use the indicator only after properly studying it. When accustomed to this Indicator, never use it alone since it is ideal to combined with the other Indicators.
While on this platform, you can get extra support, through the various tools and indicators available. Check these through this link and level up your game as far trading goes.
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