VWAP indicator is one of the widely used Intraday Indicators. VWAP will help the trader to decide the direction of the trend. I.e If the price is above VWAP you look for buying opportunity and if the price is below VWAP you look for selling opportunity.
In finance, volume-weighted average price (VWAP) is the ratio of the value traded to total volume traded over a particular time horizon (usually one day). It is a measure of the average price at which a stock is traded over the trading horizon.
VWAP is often used as a trading benchmark by investors who aim to be as passive as possible in their execution. Many pension funds, and some mutual funds, fall into this category. The aim of using a VWAP trading target is to ensure that the trader executing the order does so in-line with volume on the market.
Watch this video for easy understanding
How to use VWAP?
The VWAP can be used similar to moving averages, (Explained with example below)
- When price is above the VWAP – reflects a bullish sentiment and
- Prices below the VWAP – reflects a bearish sentiment.
- VWAP acts as a Support/Resistance depending on the direction of your trade.
- When price breaks the VWAP and closes above/below – Breakout Strategy
Traders may initiate short positions as a stock price moves below VWAP for a given time period or initiate long position as the price moves above VWAP
Four Ways To use VWAP:
1. When price is above the VWAP - reflects a bullish sentiment
Let’s understand by analyzing the below image:
- Price is above VWAP – Indicating Bullish Trend
- When the retracement occurs – there is above average volume confirming the positive trend
- Buy at retracement in the direction of the trend
2. When price is below the VWAP - reflects a bearish sentiment
Let’s understand by analysing the below image:
- Price is below VWAP – Indicating Bearish Trend
- When the retracement occurs – there is above average volume confirming the negative trend
- Sell at retracement in the direction of the trend
3. VWAP acts as Support/Resistance depending on the direction of the trade
Let’s understand by analysing the below image:
- Stock is in the Bearish Trend
- Price is taking support at VWAP – and the price was not able to close above the VWAP
- Hence, VWAP acts as a resistance line
- Sell at retracement in the direction of the trend
4.When price breaks the VWAP and closes above/below – Breakout Strategy
Let’s understand by analyzing the below image:
- Stock is in Up-trend
- Price breaks the VWAP line and closes above the VWAP – Indicating strong uptrend
- Volume is supporting the Breakout
- Buy at the point where the price has closed above VWAP
Conclusion
VWAP like any other indicator will work with great accuracy for some scripts and it fails miserably for some.
Your focus should always be on the price, then comes the game of Indicators.
Try out this indicator with your strategy and see if it works for you.
Hope this article was of help to you
If you have questions about the VWAP or want to discuss your experiences, please share in the comments section below.