The VWAP trading strategy is a common indicator traders use. VWAP stands for volume weighted average price. It’s used for short term trading. It’s a highly efficient and simple method.
Traders use it as support and resistance in a short time frame. You use it to assess the direction or trend of the stock. 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.
VWAP trading strategy is commonly applied by traders on the 1 minute and 5 minute charts. Those time frames are used when day trading because price action moves quickly.
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.
VWAP TRADING STRATEGY
Volume weighted average price 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.
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. You’ll find that the VWAP trading strategy is used as a guide.
It identifies the liquidity of the market. The more liquid the market is, the more price moves. VWAP is an indicator that traders are aware of especially if you’re going to taking a large position in a stock.
VWAP is the stock’s equilibrium and a stock will always come back to the volume weighted average price if it moves too far away from it in either direction. Traders eyeball VWAP’s location and are prepared for price to inevitably return to it.
Watch our video that explains VWAP and how to set it up here.
VWAP TRADING STRATEGY – SHOW THE TREND
The VWAP intraday strategy 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.
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 to do because you need indicator as a show of critical support and resistance.
If a price is trading below the volume weighted average price 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.
The more the price goes up, the more profit you make. 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.
VWAP TRADING STRATEGY – 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. Volume weighted average price is both support and resistance depending on which direction you’re wanting to trade.
If 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.
VOLUME WEIGHTED AVERAGE PRICE – SUPPORT & RESISTANCE
If it breaks support at VWAP, then the volume weighted average price becomes the new resistance. Making sure a support or resistance level holds is what’s going to decide the trend the stock will take.
If it breaks the support level of the volume weighted average price and trades under if for the rest of the trading day, 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. It’s kinda like the Force in Star Wars.
VOLUME WEIGHTED AVERAGE PRICE – MASTER THE FORCE
The VWAP trading strategy is such an important tool when you’re 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.
That doesn’t mean the stock will go the way you want it to go but you can minimize your risk when you trade smart and use your indicators!
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