VWAP Trading Strategy
The vwap trading strategy (volume weighted average price) and indicator is a helpful tool that traders use to get in and out of a trade. This important indicator shows the equilibrium level of a stocks trading price intraday and is a popular support and resistance indicator. Many traders use this indicator along with just candlesticks on their charts to trade successfully. They pay close attention to how far price action is from vwap.
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VWAP Trading Strategy Explained
The VWAP trading strategy (meaning: volume weighted average price) is an important intraday indicator that traders use to manage entries and exits. It averages the closing prices of a security intraday and is used as a guide for support and resistance levels. Putting it in plain English its the average price of the stock throughout the entire trading day. It’s great for intraday trading on 5 min and 1 min charts.
So what’s with all the hype about VWAP? If you’ve been checking out any message boards on trading sessions in our trade rooms you’ve probably heard it mentioned. Seems like everyone who day trades is always talking about it right? Well, in today’s post we’ll talk about the VWAP trading strategy and answer that pesky question of what is vwap. In the end, you’ll understand why you should use it to be a more proficient trader.
This indicator is a popular tool traders use to help manage entries and exits. I use it a lot for day trading and will show our traders how price reacts with it in real time.
Most traders use it for short term trading, meaning you’ll rarely see people using it on hourly and above time frame charts – however, before people BUY using a longer time frame chart, they will still often reference vwap on a intraday chart (like 1,5,15 minute for example). Longer term retail traders anchor VWAP to a key level of support on longer time frame charts, (like hourly or daily) and use this level as a key support for swing trading. Vwap trading is highly efficient and simple method when trading because there really isn’t much to it and its easy to learn this strategy.
How Is It Used in Trading?
Traders use it as support and resistance in a short time frame. Personally, 5 minute and 1 minute charts help the most, especially when trading penny stocks. You use it to assess the direction or trend of the stock. On the technical side of things, VWAP is calculated by adding up the dollar amount traded for every trade transaction (price multiplied by number of shares traded) and then dividing by the total shares traded for the day. If you’re a member of our trade room, you’ll hear us reference VWAP often on the live streams.
Volume Weighted Average Price is commonly applied by day traders on the 1 minute and 5 minute charts. Those time frames are used when day trading because price action moves quickly. Traders like volatility as it brings quick profits and lots of opportunity to long or short.
If you’re going to be getting in and out of a stock quickly, you need to have an indicator that is going to show you a trend in place and help you make trading decisions. That’s what fast trading indicators are all about. Vwap in stocks is no different.
The VWAP indicator starts at the price a stock opens at and moves up or down based on the volume and price action throughout the day. It’s more sensitive to the movement of the market at the opening but as the day progresses, the VWAP slows down.
You’ll see it stabilize and thus, you’ll find a good entry based on its movement. The reason it slows down at the end of the day is because it takes in so much data that price movement at the end of the trading day doesn’t affect its movement.
Keeping this in mind, you’ll find that the VWAP indicator is used as a helpful guide. And it feels good to know other traders are looking at it too, making it a self fulfilling prophecy type of indicator.
Is (VWAP) Volume Weighted Average Price a Good Indicator?
- VWAP aka volume weighted average price is a great indicator. It shows the stocks equilibrium price intraday. Many traders pay attention to this level because it’s a good support and resistance level. It’s a good area to pay attention to for entries and exits.
Liquidity Is Always A Plus!
Most importantly it identifies the liquidity of the market. The more liquid the market is, the more price moves and the more VWAP moves around too.
The bottom line is VWAP is an indicator that traders are aware of if they are looking to taking a large position in any given stock. It’s not a foolproof indicator by any means. Patterns and indicators are never foolproof, but it’s a very important one to keep track of.
The VWAP indicator shows the stock’s equilibrium and a stock will always come back it if it moves too far away from it in either direction. It’s like a rubber band, it wants to snap back. Traders eyeball VWAP’s location and are prepared for price to inevitably return to it. Ideally you’re looking at the stocks volume, candlesticks, and maybe some moving averages.
What Is a VWAP Trading Strategy Anyway?
The VWAP intraday strategy for trading is used to tell a short term trader whether or not a stock is bearish or bullish. If a stock touches VWAP and falls below it, this lets you know it’s in a bearish trend. This is when you’d short the stock. It can help provide intraday price targets for buying and selling. VWAP would then become resistance if price falls below.
Shorting is when you borrow shares from your broker and sell them. You return those shares to your broker and your profit is the difference.
Without the VWAP indicator, shorting would be more difficult. Why? Because you benefit from this indicator as a show of critical support and resistance.
If a price is trading below VWAP and then breaks and begins to trade above it, you would be in a bullish trend. If this happens, then you’d take a long position.
When you long a stock you expect the price to rise after your entry. Using overbought VWAP to exit is a good strategy if you’re scalping and looking for a signal to exit a long or enter a short.
As we all know, as the price goes up, the more profit you make. Provided you get the right entry. Knowing the direction a stock is moving when you’re watching a chart for an entry is going to give you the confidence you’re making a smart trade.
Support and Resistance
Volume weighted average price shows you both support and resistance. Support and resistance are so important because that can be the difference between a win and a loss. There are many different ways to find support and resistance.
Candlesticks, moving averages and the volume weighted average price are all different the ways you can find it and they’re all equally important. They each show you the little nuances that are happening as a stock moves.
The VWAP trading strategy can help to quiet the fireworks that are the moving averages. When a stock is moving quickly and you want in it can provide a stable entry. Volume weighted average price is both support and resistance depending on which direction you’re wanting to trade.
Also, when you see a price hitting the volume weighted average price and it’s support, you’re going to want that support level to hold if you want to get in.
How Do I Setup My VWAP in ThinkorSwim?
Login to ThinkorSwim. Click on studies. Then click on edit studies. Type in vwap, double click, press ok then apply Change coloring and remove bands if desired.
When it breaks support at VWAP, then the volume weighted average price becomes the new resistance. Also, making sure a support or resistance level holds is what’s going to decide the trend the stock will take.
Pay close attention to it as it breaks the support level of the volume weighted average price and trades under if for the rest of the trading day. Hence, it’s in a bearish trend.
Just like the opposite is true for a bullish trend. You want to see price break and stay above the volume weighted average price. You’ll notice that price action and vwap go hand and hand.
Master the Force
Above all, the VWAP trading strategy is such an important tool when you’re day trading. It’s actually quite easy to master. If you’re in our trade room you’ll constantly hear someone telling you to watch and see if the price breaks the volume weighted average price.
That’s because it’s such an important indicator. There isn’t an exact science to predicting what a stock will do. But having, knowing and using the tools provided to you will help you to make the most informed decision possible.
However, it doesn’t mean the stock will go the way you want it to go. You can minimize your risk when you trade smart and use your indicators!