What is VWAP? (And How to Use It)
By now you’ve probably heard this term. VWAP (Volume weighted average price) is a used by a large number of traders (especially technical traders) that helps provide some level of value in the ticker (providing insights on potential entries or exits).
So What Is It?
- The volume weighted average price (VWAP) takes into account volume and price—typically in one day
- When a price is above VWAP, it usually is a sign of an upward trend or buyers taking control
- When a price is below VWAP, it usually is a sign of a downward trend or sellers taking control
- It shouldn’t be your ONLY decision on entering or exiting a trade, but certainly can be a valuable part of it (as many traders do depend on it)
The Formula for the VWAP = (PRICE x Shares Traded)/Total Shares Traded
Limitations of VWAP
VWAP is calculated daily—each trading day it resets at market open. So really, it’s not an indicator you’d find valuable for long-term trades. Really, it’s a “trend is your friend” tool.
VWAP as a Trading Tool
I actually started using this as an indicator about a year ago after listening to a trader named "Roland Wolfe" (a Tim Sykes student). I was in between trades, out at the gym with my headphones in doing crunches when I heard Roland say he fell in love with VWAP and became a believer in it when he saw how often it played out.
Funny thing is I actually didn't intend for the video above to be a VWAP vid. I was planning on doing some live trading and decided to take a moment (while trading seemed to be slow) to cover this trading tool I use every day. I consider it a crucial part of my decision making-- as you'll see in the video.
This is the graph following the end of the vid. As you can tell, once confidence is lost on a stock using a common method (a lot of day traders rely on VWAP) it's hard for the stock to regain buyers' attention.
Honestly while it shouldn't be your only indicator, you definitely need to know this one.