How to use volume-weighted average price to increase transaction profit rate?

In the trading field, the volume-weighted average price (VWAP) is an important technical indicator that is widely used in evaluating market trends and formulating trading strategies. VWAP not only reflects the average transaction price of the market, but also considers the important factor of transaction volume, thus providing a more accurate basis for market analysis. In this article, EagleTrader will analyze the VWAP indicators in detail to provide candidates with more practical trading tools.

What is VWAP

VWAP’s calculation method is relatively complex. It does not simply take the average price in a certain period of time, but multiply the trading volume in each time period with the corresponding price, then sum the products, and finally divide by the total trading volume in that time period. The specific formula is:

VWAP=(Σ(price × trading volume))/total trading volume

where Σ represents summing, the price refers to the transaction price of each time period, and the transaction volume refers to the transaction volume within each time period.

Give examples

Suppose that a currency pair trades within one day as follows:

10:00, the price is 1.1000, and the trading volume is 100 lots.

11:00, the price is 1.1050, and the trading volume is 200 lots.

12:00, the price is 1.1100, and the trading volume is 300 lots.

Then, the calculation process of VWAP is as follows:

Calculate the product under each transaction price:

10:00:1.1000×100=110.00

11:00:1.1050×200=221.00

12:00:1.1100×300=333.00

Sum:

Total product=110.00+221.00+333.00=664.00

Calculate total trading volume:

Total trading volume=100+200+300=600 lots

Computing VWAP:

VWAP=664.00/600=1.1067

So the VWAP of the pair on this day is 1.1067.

VWAP application scenarios

Evaluate transaction execution costs

VWAP can be used as an important reference for measuring transaction execution efficiency. Traders can evaluate the cost-effectiveness of a transaction by comparing the gap between the actual transaction price and VWAP.

Judge market trends

VWAP can help with transactionsThose who identify the support and resistance levels of the market. When the market price is higher than VWAP, the market may be in an upward trend; when the market price is lower than VWAP, the market may be in a downward trend.

Develop a trading strategy

VWAP can be used as an important basis for formulating buying and selling strategies. For example, in bulk trading, traders may choose to buy and sell above or below VWAP to ensure the transaction costs are as low as possible.

Precautions

1. Signal accuracy:

VWAP is not a universal indicator, and error signals or lag signals may also occur. Therefore, when using VWAP, it is necessary to combine other factors to make judgments and filters, such as market sentiment, news events, K-line patterns, etc.

2. Applicable market:

VWAP works better in markets and varieties with large trading volume, good liquidity and high volatility, such as the international foreign exchange market. VWAP may be ineffective in markets and varieties with small trading volume, poor liquidity and low volatility.

3. Parameter settings:

VWAP parameter settings will affect its effect. In short-term trading, a shorter time period can be used to calculate VWAP; in long-term trading, a longer time period can be used to calculate VWAP. Different time periods will produce different VWAP values, so you need to choose appropriate parameters based on your trading style and goals.

VWAP can help traders better understand market trends, judge trends, and formulate reasonable trading strategies in trading. However, any indicator has its limitations, and VWAP is no exception. Therefore, when using VWAP, we need to maintain a cautious and rational attitude, and conduct comprehensive analysis in combination with other technical indicators and market information to improve the success rate and profitability of the transaction.