VWAP, as we know, refers to the volume weighted average price and is used as a benchmark to see if we have traded our cryptocurrency above or below the ideal rate for the day, or the average rate that prevailed during the entire day. Usually the price below VWAP indicates that the crypto was traded cheaply as compared to the intraday price, and above VWAP indicates that the security was traded expensively as compared to the intraday price.
How to Calculate VWAP
VWAP or the volume weighted average price is different from the moving weighted average price. This is based on intraday tick data. There are a few steps to be followed so as to calculate VWAP for some currency in some time.
1. Decide on the currency that you want to calculate the VWAP for that is the one that you are interested in.
2. Decide on the time for which you want to calculate the VWAP, this is usually spread over a day in most cases.
3. Divide the time into equal time frames, say 15 minutes, 30 minutes or just say 5 minutes etc. This is known as the intraday period.
4. The calculation must start when the trading opens and ends when it closes.
5. Compute the typical price for the intraday period. This is nothing but dividing the sum of high, low and closing price, by 3.
6. Now multiply this typical price by that period’s volume.
7. Now create a running total for these values, so that you have a cumulative total.
8. Also calculate the running total of volumes, so you have a cumulative volume.
9. The last is to divide the cumulative total of the price volume (step 7), by the cumulative total of the volumes (step 8).
10. Plot this as a curve to view it graphically.
In order to customize or meet specific requirements, an investor might want to create his/her own VWAP for longer periods of time, or for shorter periods of time. VWAP charts can be modified easily with the help of the above calculations as one requires. There are many companies that provide expert services in reading VWAP ratios, charts and then using them for the best trading decisions. However, please remember that VWAP will only show historical value, however those can be reflected to speculate the market for the present and the future.
Another consideration is that while it is easy to build a VWAP chart; it is difficult to interpret it. Therefore it is always advisable, to hire some expert services, who can easily help you out. A very reputable name when it comes to VWAP for cryptocurrencies is executium.com. They offer a platter of services related to cryptocurrency which can be utilized along with VWAP ratios to make the best trading decisions. For example, VWAP ratios can be plotted as overlay indicators in Sharp Charts. A very common modification is MVWAP, which is the moving volume weighted average price for a cryptocurrency.