Watch our video on how to use the vwap trading strategy.
Lets talk about the VWAP trading strategy. VWAP is a common indicator traders use to help manage entries and exits. VWAP stands for volume weighted average price. Most traders use VWAP for short term trading, meaning you'll rarely see people using it on hourly and above time frame charts. It’s a highly efficient and simple method when trading because there really isn't much to it. The video above gives you a basic overview on the vwap indicator. Read More
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.
Volume Weighted Average Price 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. 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.
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. You'll see it stabilize and thus, you'll find a good entry based on its movement (register for our free stock market courses and we'll teach you how to read the stock market).
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 trading strategy is used as a helpful guide. And it feels good to know other traders are looking at VWAP too, making it a self fulfilling prophecy type of indicator.
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.
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. 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, candle sticks, and maybe some moving averages Looking to learn stock trading? Make sure to take our day trading course to help you get started.
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. It can help provide intraday price targets for buying and selling.
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.
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. If you want to access our stock alerts with real time entries and exits, come check out our stock alert page.
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.
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. Check out our post on how to get started in stocks.
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.
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! Take our free stock market courses if you need more help trading.
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