Volume Weighted Average Price (VWAP) is a popular trading indicator used by traders in various financial markets, including forex trading. VWAP is a powerful tool that helps traders to identify trends, support and resistance levels, and potential reversal points in the market. In this article, we will explore why VWAP works in forex trading and how traders can use it to improve their trading strategies.
What is VWAP?
VWAP is an indicator that calculates the average price of a currency pair based on its trading volume. The indicator takes into account the volume of each trade and calculates the average price at which the currency pair was traded over a specific period. VWAP is a dynamic indicator that changes throughout the day as new trades are executed. It is commonly used by institutional traders to assess the average price of a stock or a currency pair over a specific period.
Why does VWAP work in forex trading?
1. It provides a measure of market sentiment
VWAP is a powerful indicator that provides traders with a measure of market sentiment. By calculating the average price of a currency pair based on its trading volume, traders can identify whether the market is bullish or bearish. If the VWAP is above the current price, it indicates that the market is bullish, and if it is below the current price, it indicates that the market is bearish. This information can be used by traders to make informed trading decisions.
2. It helps to identify support and resistance levels
VWAP is also useful in identifying support and resistance levels. When the price of a currency pair is below the VWAP, it indicates that the market is bearish, and the VWAP may act as a resistance level. Conversely, when the price of a currency pair is above the VWAP, it indicates that the market is bullish, and the VWAP may act as a support level. Traders can use this information to set their stop-loss levels and take-profit levels.
3. It helps to identify potential reversal points
VWAP can also be used to identify potential reversal points in the market. When the price of a currency pair is moving away from the VWAP, it indicates that the market is trending. However, when the price of a currency pair moves towards the VWAP, it indicates that the market may be about to reverse. Traders can use this information to identify potential trade entry points and exit points.
How to use VWAP in forex trading
1. Identify the trend
The first step in using VWAP in forex trading is to identify the trend. Traders can do this by looking at the position of the price relative to the VWAP. If the price is above the VWAP, it indicates a bullish trend, and if the price is below the VWAP, it indicates a bearish trend.
2. Identify support and resistance levels
Traders can also use VWAP to identify support and resistance levels. When the price is below the VWAP, it may act as a resistance level, and when the price is above the VWAP, it may act as a support level.
3. Identify potential reversal points
Traders can use VWAP to identify potential reversal points in the market. When the price is moving towards the VWAP, it may indicate that the market is about to reverse. Traders can use this information to identify potential trade entry points and exit points.
Conclusion
VWAP is a powerful trading indicator that provides traders with a measure of market sentiment, helps to identify support and resistance levels, and identifies potential reversal points in the market. Traders can use VWAP to improve their trading strategies and make more informed trading decisions. However, it is important to note that VWAP should be used in conjunction with other technical indicators and fundamental analysis to make informed trading decisions.
