The Volume Weighted Average Price indicator or VWAP Indicator MT4 is not new to so many veteran traders. But if you are a beginner trader, you certainly may not know or understand how to trade with it. The indicator shows the average real price of an asset class. It does this by taking into consideration the transaction volume at a specific price.
The VWAP indicator is handy because, in the real sense of it, the average price doesn’t represent the true picture of the security being analyzed. This tool was developed to help traders find the real price using the volume of transactions at specific prices. With the indicator, traders can now determine whether or not the price of security closed at a low or high, with low or high volume. Traders can also determine whether the volume represented the price of a security when it hit a new low or high.
The indicator is exclusively suited for day traders. Day traders are those who trade the FX market on a short-term basis, either for a few minutes or hours. If you are a long-term trader, this indicator may not be suitable for you. During a given session, you can use this tool to trade different currency pairs and make a decent profit. There’s need to be familiar with the use of this indicator; hence, the essence of this article.
Before we dive deeper to explain how to use the indicator, let’s quickly walk you through what the indicator is and why traders prefer it to regular prices.
What Is The VWAP Indicator MT4?
The VWAP Indicator MT4 is a tool that comes handy to enable traders to determine the average true price that investors paid for a particular asset class. In essence, it gives traders an idea of how wider markets are positioned.
So, in a way, if you observe that there is a lot of transaction going on in a particular currency pair, you can expect that there is a lot of selling and buying interest at that price level. To some extent, the indicator can show price levels that can act as resistance or support.
The VWAP indicator is very popular among different categories of traders. Since it deals with high frequency and algorithmic trading. These types of trading systems use the VWAP Indicator to scale out or scale into position. Using the indicator is an advance or technical way of trading compared to regular price. As such, it caught the attention of day traders on the MT4 trading platform.
How To Use The VWAP Indicator
Veteran traders that understand the dynamics of this indicator use it in different ways to trade the market. However, one common method of using the indicator is when an asset price trades below the VWAP. In this case, it means the security is trading at a discount. Conversely, the asset price can also trade above the VWAP. And if this happens, it means the security is trading at a premium.
The security price tends to revert to the volume weighted average price at regular intervals. The indicator is based on the price calculation, as follows:
1. The typical price is taken for the selected period. The price is the average of the low, high, as well as the close. Each of the periods or sessions is represented by a Candlestick or by one bar. As a trader, you can set the period to your desired value.
2. The volume of trade is now multiplied by the typical price. The volume and the value are calculated and dubbed as the typical cumulative price by the volume (TP x V).
3. Dividing TP x V by the cumulative volume will give you the VWAP for the selected period. The VWAP is usually calculated over every period.
4. You will then plot all these values on the chart. Beside the VWAP Indicator, there are other tools in the volume analysis category that we will mention later in this article.
5. Therefore, use this indicator only when you’re sure of how it works. Better still, you can combine it with other volume analysis metatrader indicators to increase your chances of earning a profit.
Installing The VWAP Indicator
The first step is to download the VWAP Indicator MT4 onto a folder. Make sure you download the file from a reputable source. Once it is downloaded, copy the file to the MQL folder in the MT4 trader’s indicator folder. After that, restart or start your MT4 trading platform and wait for the platform to load.
Open the navigator window and refresh the indicator list to enable the trading terminal to capture the VWAP Indicator. Once you see the indicator on the list, drag and drop it on your chart of choice. The configuration window will then appear as in the screenshot below.
From the configuration window, you can set the indicator to suit your trading preferences. You can only adjust the shift and trading period. You can play around with the period values. However, don’t use the default shift, as the indicator may not work correctly.
After configuring the indicator, click okay and the indicator will appear on the chart as in the screenshot below.
From the screenshot above, it is clear that the indicator appears very similar to the Moving average. Each time the security jumps either above or below the VWAP, most traders see it as trading signals. Because of this, the VWAP also acts as the mean reversion tool.
Retail traders use this indicator to buy when the security price is below the VWAP. And to sell when the security price is above the VWAP. If the indicator is not applied properly, you may lose your hard-earned money to market forces.
Conclusion Of VWAP Indicator MT4
The VWAP Indicator MT4 is a must-have if you are a day trader. While it requires maximum attention and concentration to use the indicator. It can potentially increase your chances of winning in a trade position. Measuring volume is very important when it comes to measuring market liquidity. The indicator, on the other hand, can be used to measure market liquidity.
The VWAP Indicator is not a holy grail. And that’s why we always advise not to use the indicator in isolation. Using the indicator alone doesn’t guarantee an improvement in your trading results and earnings.
You have to use it alongside other indicators such as the Support and Resistance, Gap Indicator, Break indicator, as well as Stochastic Oscillator indicator. If you are a day trader, the good news is that we have these indicators on this platform for you to explore through this link.