Volume Weighted Average Price (VWAP)

Alfred

Aug 10, 20232 min read

How is VWAP Calculated?

What is Anchored VWAP?

The VWAP is constantly calculated from the start of the market open to the close. For any number of specific reasons, a trader may want to specify the starting point to start calculating VWAP at a different time other than the open. This is where an anchored VWAP is used. An anchored VWAP starts calculating from a selected starting period by the user. There are a number of reasons for using an anchored VWAP like trying to normalize a price due to a large price gap up or down.

Typical Timeframes

The VWAP is typically used intraday with the default settings. Many VWAP indicators also come with an upper and lower trend line that is similar to a Bollinger Band. The intraday time frame VWAP value can change depending on the time frame of the chart. A 5-minute or 15-minute VWAP is typical when trading intraday to illustrate the trend.

Why is VWAP Important?

The VWAP indicator is significant for the purposes of its use. It provides a context of the price trend depending on where the stock is trading (above or below) in relation to the VWAP line. A stock trading above the VWAP as the line rises indicates an uptrend and vice versa on a downtrend.

Used by Institutions

As traders jump on board trying to get ahead of the next trader, the stock may naturally rise towards the VWAP. On the flipside, bears that expect a rejection at the VWAP may place their limit orders to short-sell the stock at the VWAP expecting profit takers and more sellers to come in. The VWAP is most useful when combined with other indicators or with a trading methodology.

Institutions and fund managers may use the VWAP to gauge the quality of their order fills. If they are constantly getting filled above the VWAP, it may cause the manager to seek other market makers or traders to carry out the order fills. Institutions may want to get into a position, but the price at which they get in can make a market impact.

How to Trade With VWAP

Entry and Exit Levels

One trader’s support is another trader’s resistance. In other words, a trader who is long a stock can use the VWAP as a target exit if its trading below. Traders looking to take a long position can wait for the stock to breakout through the VWAP for longs or pullback and bounce off VWAP on pullbacks. The VWAP makes for a great entry and exit area. If you also have the accompanying higher and lower envelopes, these can be used for entries back towards the VWAP.