Bitcoin’s VWAP indicator is an alternative tool to the Realized Price (MVRV), to determine the average price that the market has paid for each unit.
This indicator was first presented by the Twitter user @icoexplorerVWAP stands for “volume weighted average price”. Some use it to predict the price of Bitcoin.
For this reason, VWAP is similar to the MVRV indicator so it can be used to find the highs and lows in the market.
What is the Bitcoin VWAP indicator?
The Volume Weighted Average Price (VWAP) is a trading benchmark that some investors often use. So it is not a proprietary indicator of Bitcoin.
Large institutional buyers and mutual funds use the VWAP ratio to help get in or out of stocks with the least possible impact on the market.
This metric reflects the relationship between the price of an asset and its total trade volume.
VWAP equals the sum of volume of each transaction multiplied by the price of each transaction divided by the total volume for the trading day.
And it is determined with the following expression:
This reflects the volume weighted average price that the market paid for 1 BTC. So this indicator is a popular tool that traders use as support to manage their inputs and outputs.
The standard VWAP is calculated using all orders on a given trading day. However, it can also be used for different periods of time.
Most traders use it for short-term trading; as a trend confirmation tool, and to build trading strategies to predict the price of Bitcoin.
How to use this indicator?
In simple terms, VWAP is similar to a moving average.
Its advantage is that it helps to eliminate a large part of the noise seen on the market during the day. So it is more complete than a moving average.
Unlike moving averages, VWAP assigns more weight to high-volume Bitcoin price levels. This allows traders to understand price interest levels, measure relative strength, and identify major inputs / outputs.
For this reason, if the price starts to rise above the VWAP, this is a sign that the odds are in favor for a higher sustainable move.
On the other hand, a break below the VWAP provides an opportunity to sell.
Once the settlement is exceeded, the price moves further away from the VWAP, indicating that the Bitcoin price will seek to return to its average value.
The key is to observe the price increase with significant volume confirming that the stock is likely to run in the desired direction.
Additionally, the VWAP provides dynamic support and resistance areas and will move in the direction of the main trend.
For example, in early 2019, the price rose above Bitcoin’s VWAP short-term indicator provided a signal to buy around $ 3,600.
Later that year, the price of Bitcoin broke below the VWAP providing a sell signal. We can also see the trend of the VWAP downwards.
The VWAP is a good tool to measure the relative resistance of the market. Because it is easy to determine, it is most useful for evaluating small, short-term transactions.
However, it does not take into account the order time. For that reason, it does not accurately indicate when the price and supply of trades are at their peak.
VWAP is based on historical values and does not inherently have predictive qualities or calculations.
Because VWAP is anchored to the day’s opening price range, the indicator increases its lag as the day progresses. All indicators are based on past data and none will have the ability to “guess” the price action.
However, the VWAP combined with other indicators, can be very useful, as long as its management is learned with an adequate strategy and capital management.