The VWAP indicator for MT4 is a well-known instrument for the majority of experienced traders. The abbreviation stands for the Volume Weighted Average Price, which means that the tool is mainly used to describe the real average price of the asset. The main idea is the ability to capture a specific asset price and take into account its transaction volume.
While proven Forex veterans will hardly find it difficult to use the indicator, beginners may face possible obstacles right from the start. What's more, it will only suit day traders. If you use strategies that rely on a long-term basis, the indicator will make no sense. On the other hand, the MT4 VWAP indicator delivers enough flexibility to successfully trade a variety of currency pairs or stocks and make a good profit.
We are about to dive deep into details on how to use and read the indicator. To make things a bit simpler for beginners, we will explain what it actually is, how it works, and why it is necessary.
VWAP Indicator for MT4 Explained
According to the indicator's name, it becomes clear that traders mainly use it to define the average asset price. When we say "price", we mean the "true" price that can be affected by the transaction volume. The idea of using VWAP appeared after some traders' concerns that the closing value does not always highlight the accurate average price.
As a result, the indicator was developed to help traders find the real average price based on the total amount of transactions completed at a specific price level. In other words, the tool makes it possible to have a different look at the financial market, although considering that the closing price is still to take into account.
Tips to Use MT4 VWAP Indicator
To make the most of the MT4 VWAP indicator, you need to understand its dynamics. However, beginners may start with a common way of using the tool. If the price goes below the VWAP, it means that the asset is traded with a discount. And vice versa, if the price goes above the VWAP, the asset has reached its premium trading level.
The indicator operates using a simple calculation basis:
- It selects a typical price over a given timeframe. The average value generally relies not only on the closing price but also on its high and low. A single bar or candlestick represents the trading session. You are free to change the value for the desired period.
- Trading volume is multiplied by the typical price. We actually have an example of cumulative price calculations with a typical TP x V formula.
- Then traders need to divide the formula by cumulative volume in order to generate the VWAP for a chosen session.
- The next stage is to have all values plotted on the chart.
Keep in mind that the VWAP indicator for MT4 is not the only instrument to calculate the average price at a specific transaction volume. You are free to use other instruments. Use VWAP only if you clearly understand how it works. Now, let's see how easy it is to have the indicator installed on the trading platform.