LEARN VWAP IN 3 MINUTES – BLOCKCHAIN 101

Introduction

The high volatility and 7 * 24H trading nature of the cryptocurrency market make it a challenge and opportunity for traders. In this fiercely competitive market, traders need to use various tools and strategies to gain an advantage. Among them, Volume Weighted Average Price (VWAP) is a popular tool. This article will introduce the concept and calculation method of VWAP, and analyze its application in cryptocurrency trading through practical cases.

Basic concepts of VWAP

1. What is VWAP?

The full name of VWAP (Volume Weighted Average Price) is the trading volume weighted average price. It is the price obtained by weighting the average price of assets over a given time period based on trading volume. Simply put, if a stock has a large trading volume at a certain price, then that price will occupy more weight. Unlike simple average prices, VWAP places more emphasis on price changes during periods of high trading volume, as it allocates more weight to transactions with high trading volume.

The reason why VWAP has become a particularly powerful indicator is because it incorporates trading volume into the calculation of average prices. Some traders believe that trading volume is the most important indicator beyond price behavior itself. The reason why VWAP has become a particularly useful tool for both analysts and traders is that it combines these two important indicators into one.

VWAP can display dominant market trends and important liquidity areas.

2.  Calculation method of VWAP

The calculation method of VWAP is relatively simple. It is calculated by the following formula:

• VWAP=∑ (typical price * trading volume)/∑ trading volume
• Among them: Typical price=(highest price+lowest price+closing price)/3

Sample

For example, there are three individuals A, B, and C trading ETH.

A buys 100 at 1000U, B buys 300 at 800U, and C buys 200 at 1100U

According to the formula, VWAP should be equal to

(100 * 1000+300 * 800+200 * 1100)/(100+300+200)=933.33

The buying prices of A and C are both above 933.33, while the buying price of B is below 933.33. So the buying price of B is lower than the current market (indicating that the price may be undervalued), while the buying prices of A and C are both higher than VWAP, so it can be considered that their holding costs are higher than the current market.

Based on the above examples, some intraday traders use VWAP as the buying price benchmark. If the buying price is higher than VWAP, it is not ideal, and if the buying price is lower than VWAP, it is a good opportunity. Of course, this is not absolute, it is only relative.

At the same time, some large investment institutions will use VWAP to ensure that their order prices do not deviate too much from the market, causing drastic fluctuations in the market.

The application of VWAP in cryptocurrency transactions

1.Trend Analysis

VWAP is used in the cryptocurrency market to analyze price trends. When the current price is higher than VWAP, it may indicate a bullish market, and vice versa. Traders can develop buying or selling strategies based on this information.

2. Trading Strategy

VWAP can also be used to develop trading strategies. For example, if the price of a cryptocurrency falls below its VWAP for a period of time, it may be considered a buying opportunity as the price is relatively low. On the contrary, if the price is higher than VWAP, it may be a selling opportunity.

3. Transaction Execution

Institutional investors typically use VWAP to evaluate the execution quality of bulk trades. They hope to complete the transaction at a price close to or below VWAP to reduce the impact on the market. This can be achieved through segmented transactions to avoid a significant impact on market prices caused by a one-time purchase or sale.

Actual case: Bitcoin (BTC) trading

Now, let’s take a look at the application of VWAP in cryptocurrency transactions through a practical case study.

Sample

Assuming you are an active Bitcoin trader. You want to find the best buying opportunity within a day. The following is the relationship between Bitcoin prices and VWAP at different times of the day:

• 9: 30 AM: Market opening, Bitcoin price higher than VWAP, market may be biased.
• 11: 00 AM: Prices continue to rise, but close to VWAP, the market remains bullish.
• 1: 00 PM: The price has slightly decreased, but still higher than VWAP, and the market maintains a bullish trend.
• 3: 00 PM: Prices begin to decline below VWAP, and the market may turn bearish.
• 4: 00 PM: The market is closed, and the price of Bitcoin is much lower than VWAP, which may be a selling opportunity.

By observing the relationship between price and VWAP, you can make wiser decisions on when to execute buy or sell orders in order to achieve more favorable transaction execution.

Conclusion

Volume Weighted Average Price (VWAP) is one of the widely used tools in cryptocurrency trading, which helps analyze market trends, formulate trading strategies, and evaluate the quality of trading execution. This article introduces the concept and calculation method of VWAP, and demonstrates its application through actual Bitcoin trading cases.

Understanding and utilizing VWAP is crucial for success in the cryptocurrency market. However, it is only one of the many available tools, and traders still need to learn and practice deeply to improve their performance in this exciting yet challenging market.