What Is The Volume Weighted Average Price & How To Trade With It

The Volume Weighted Average Price (VWAP) band is a valuable trading tool that can help to reduce market noise and show price trends. This technical indicator includes both the price and the volume of each trading session. It is, therefore, a useful benchmark for assessing market trends when trading forex, stocks, commodities, cryptocurrencies and more. The volume weighted average price helps compare the current price of the stock to a benchmark, making it easier for investors to decide when to enter and exit the market. Also, the VWAP can assist investors in determining their approach towards a stock (active or passive) and make the right trade at the right time.

What is the Volume Weighted Average Price (VWAP)?

The Volume Weighted Average Price is about the relationship between the price and the volume (trading turnover). The VWAP is the average rate of all transactions within a trading session. (Not to be confused with the VWMA = volume-weighted moving average).

The VWAP indicator is calculated cumulatively, taking into account the volume traded during the trading session. For this reason, you do not have to select a historical observation period.

The formula for calculating the VWAP

The calculation of the Volume Weighted Average Price is the sum of traded volume, multiplied by the price, divided by the sum of the traded volume.

Important points you should know about the VWAP

  • The calculation is based only on price and volume of the current trading session (in contrast, the typical moving averages that include the prices of the last trading session).
  • Used to measure trading efficiency on large institutional orders. For example, you can execute a buy order at an average price below the VWAP daily close price.
  • Is more sensitive to price and volume changes at the start of the trading session and less sensitive during the session.

Due to this progressive delay, the VWAP may not be suitable for timing the entry into the market.

VWAP on chart
VWAP on chart

How to use the Volume Weighted Average Price indicator?

Here we will look at a method that can be used to implement the Volume Weighted Average Price into an day trading strategy.

  1. Pay attention to a trend running away from the VWAP. (Tip: Pay attention to trend bursts that consist of at least three successive course bars that do not overlap with the VWAP.)
  2. Make sure that this course push continues or is rejected to the VWAP level.

If the price surge continues outside of the VWAP, we may assume that it is a trending trading session. In this case, we can then consider momentum trades in the trend direction using a trend trading strategy.

If the market rejects the VWAP surge, we may assume that it is a trading session with a sideways movement. In this case, we could consider making trades that move towards the mean using a range trading strategy.

Example of trend trading session

VWAP trending session
VWAP trending session
  1. Concentrate on the first attempt to push the market away from the VWAP (ideally, these are the first three consecutive candles that no longer touch the VWAP)
  2. This candle confirms that the market is continuing the bullish surge; a bullish market can be assumed.
  3. A strong trending trading session often stays entirely above the VWAP.

This example also shows why the VWAP might not be suitable for a timed entry. For example, if we plan to trade pullbacks to the VWAP, we won’t have a chance to take part in this wonderful bull run. Therefore, we could consider a simple setup that targets aggressive trends when timing trade positions.

Example of sideways trading session

VWAP sideways session
VWAP sideways session
  1. Pay attention to the market’s attempt to push the price away from the VWAP (preferably the first three consecutive candles do not touch the VWAP).
  2. The market failed to push prices higher.
  3. This attempt to move prices away from the VWAP also failed.

If you pay attention to the slope of the VWAP, you can get useful information to assist with your market analysis.

VWAP trading strategy

Here’s a simple forex trading strategy that can be applied on any timeframe and on any trading instrument. Swing and position traders use the VWAP in the same way as a moving average. For example, they may look for crossovers between the VWAP and stock price as a trading signal—or part of a larger trading system.

VWAP Bands buy strategy

  • Look for the price to break the middle band to the upside.
  • Wait for the candle to close to enter the trade.
  • Stop-loss can be placed below the lowest band.
  • We can exit the trade by placing the take-profit order twice the size of the stop-loss.
VWAP buy setup
VWAP buy setup

VWAP Bands sell strategy

  • Look for the price to break the middle band to the downside.
  • Wait for the candle to close to enter the trade.
  • Stop-loss can be placed above the upper band.
  • We can exit the trade by placing the take-profit order twice the size of the stop-loss.
VWAP sell setup
VWAP sell setup

VWAP indicator conclusion

The VWAP indicator can be used on your forex trading platform charts to help filter potential trading signals as part of an overall trading strategy. The volume-weighted average price (VWAP) indicates the average price of an intraday period weighted by volume. The value is calculated during the trading day, from open to close, making it a real-time dynamic indicator. Because it is a summarized version of only one day, VWAP shows no real effect in making predictions or calculations for the future except for assumptions. VWAP can be calculated for a period of time. However its accuracy may not always be reliable.

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