The Volume Weighted Average Price (or VWAP for short) is equal to the sum of volume for every transaction multiplied by the price of every transaction divided by the total volume for the day.
The VWAP is similar to the realised price in that it determines the average price the market paid for their coins.
We can also use the VWAP to price ratio (VWAPR) to identify market tops and bottoms, which can be found here. One good aspect of the VWAPR is that the tops are roughly similar in height across different cycles in bitcoin. As the chart below shows, the VWAPR generally peaks around 4.30.
The VWAPR has bottomed out around 0.43 to 0.32 in the most recent cycles, it doesn’t really provide a precise lower threshold.
Source: Woobull charts
The 90-day VWAP can also be used to obtain trading signals for shorter timeframes.
You can add the VWAP to TradingView charts (the sensitivity can be changed by adjusting the time period used). As the chart below shows, VWAP can be used like a moving average since it is the volume-weighted average price the market paid for 1 BTC.
For instance, in early 2019, the price jumped above the short-term VWAP provided a signal to buy around $3,600. When the price breaks above a moving average, it provides a buy signal, but if the price moves too far away from the moving average, buyers eventually become exhausted and provides an exit signal.
As the chart shows, the price moved higher after breaking above the VWAP but the price eventually strayed very far away from it as bitcoin hit highs above $13,000, suggesting a return to the mean.
On the other hand, a break below the moving average provides an opportunity to sell, and once the sell-off is overextended, the price moves further away from the moving average, suggesting the price will return to its average value. In Autumn 2019, the price of bitcoin broke below the VWAP providing a sell signal. We can also see the trend of the VWAP turning downwards.
Also, the VWAP provides areas of support and resistance and will move in the direction of the major trend. For example, during the downtrend in 2018, the price tested the VWAP several times before being sent lower. The VWAP eventually flattened out as the price of bitcoin bottomed and started to turn upwards as the rally in early 2019 began.
The VWAP can also be used with a shorter time period. When combined with a lower timeframe, such as the 4-hour or hourly chart, the VWAP can provide more frequent signals but of course comes with a higher probability of fake signals.