VWAP Intraday Statergy
Now we will tell you about VWAP statergy.
VWAP is a technical indicator that stands for “Volume Weighted Averaged Price” and reflects the average price a stock traded at (taking volume into account). This indicator can be great for understanding money flow and significant price levels. For example, if a stock traded 1500 shares at $10 and 500 shares at $12, VWAP would be $10.5
VWAP is used by traders and algorithms to identify significant price levels. Price action around VWAP may seem arbitrary to traders who don’t have the indicator on their charts so it is a good indicator to be aware of.
VWAP is especially beneficial for momentum trading and it offers a variety of applications.
First, it can be used as a support/resistance level for gauging risk. If a stock is trading above VWAP, you can use VWAP as a level of support. If a stock is trading below VWAP, you can use VWAP as a level of resistance.
You can also use VWAP crossovers as triggers for reversal trades. For example, if a stock has been trending above VWAP all day, you may initiate a short position as the stock breaks below VWAP. Contrarily, you may initiate a long position as a stock breaks above VWAP. When you plan this type of trade, you can base your risk around VWAP.
Here is an example of both a VWAP crossover and VWAP acting as a resistance level:
Volume-weighted average price (VWAP) is the average price weighted by volume.
Institutions often base VWAP on every single tick of data that occurs during the trading day. Calculating VWAP based on other time frames, such as 1-minute or 5-minute price bars is also acceptable, and is how most chart platforms like Investar plot it. Volume-weighted average price (VWAP) is calculated using the following steps:
- Pick what period you’ll use as your input, 1-minute price bars, 5-minute price bars, etc.
- For each bar take the High + Low + Close and divide by 3. This gives you a “typical” price for that period.
- Multiply the typical price of that period by the volume for that period, to get the Weighted Price.
- Keep a running total of the Weighted Price, as well as a running total of volume as new data becomes available (a period ends). These are called Cumulative (or Total) Weighted Price and Cumulative Volume respectively.
- To get the VWAP, divide the Cumulative Weighted Price by Cumulative Volume.
VWAP resembles a moving average, where prices above the VWAP indicate a bullish trend and prices below the VWAP indicate a bearish trend. VWAP is generally used by technical analysts to identify market trend. When price and VWAP cross each other many times, the trend is usually sideways. The screenshots below show examples of bullish, bearish and sideways trend.
When the price is below the plotted VWAP values, the trend is going down, or there is a downward bias to the trading day. Institutional buyers thinking of buying tend to buy when the price is below VWAP, as they are in a position to accumulate a position at a better price as compared to normal (VWAP) price.
Short-term traders generally do the contrary, interpreting the price below the VWAP as bearish, as well as seeking short positions.
When the price is above the plotted VWAP, the trend is probably going up. Institutional buyers trying to sell or short will often attempt to sell when the price is above VWAP, as they are in a position to accumulate a short position. Short-term traders generally do the opposite, interpreting the price above the VWAP as bullish, and look for long positions.
Volume-weighted average price (VWAP) is an aid and a reason for price information that lowers market noise. It does not provide entry signals, stop loss levels or target prices.
VWAP can also experience lag. VWAP lags price simply because it is an average depending on past data. The more data there is, the greater the lag. For example, when you are using a 1 minute chart, after five hours of trading, VWAP has been computed for 300 intervals. The lag related to this would be similar to a 300 period moving average.
The Volume Weighted Average Price (VWAP) is an appealing indicator because unlike various other technical analysis tools, it is best suited for intraday analysis. VWAP is a great technical indicator simply because it represents both price AND volume. VWAP doesn’t provide trade signals like many other indicators; it’s an analysis and benchmarking tool. As the day progresses the VWAP begins to lag more and more. Therefore, retail traders find it more beneficial early in the trading session, and institutional traders find it more beneficial toward the close.