Hello everybody, today I am going to be taking a look at an indicator called the VWAP (volume-weighted average price). This is a very solid indicator in my opinion. It is something that I use every day to get an understanding of the general sentiment of the market, my general bias, and also to find the best entries and take profit or exit levels. VWAP is not popular among retail traders, but it is a tool that the larger institutions and the big money use
very frequently in order to get in and out of an asset with basically as little impact as possible.
What is VWAP
VWAP is the average price of an asset during a given time period. Basically, it is an important benchmark of price. It removes a lot of the noise showing
the sentiment and value of an asset.
Calculation
VWAP = (∑Price * Volume)/∑Volume
The calculation here is the sum of price for a particular period or candle times by the volume of that candle and then divided by the cumulative volume.
How to Trade it
In ranging conditions the VWAP will act as a magnet. When you are looking at range-bound conditions very often you will find your VWAP just kind of goes along through the middle of it, so if price goes above it is pretty good value to take a short position. And then when it back into your VWAP and then price comes below you can probably get a good move back into your VWAP from that therefore it is a really good area in which you look for longs. Basically, if price is below VWAP look for long, and if price is above VWAP look for short, and in both situations take profit when price reaches that VWAP area. During trending conditions, VWAP gives a good entry. In a downtrend very often you will find your VWAP gives you these entries in order to find good value for those short in order to push price down. If that is the other way up and you're in an uptrend then of course the VWAP can give you a good entry for a long position.
To sum up, these are the main strategies with this particular indicator. There are a lot of other strategies that are mostly combined with other indicators.
For example, many people use VWAP with standard indicators like MACD as a confirmation (which is pretty bad in my opinion). My favorite combination is the combination of VWAP with initial balance and volume profile.
Hope you found today’s article helpful. If you want to learn more about trading follow me at @fizzonmyjayyce. Have a nice day :)