VWAP Indicator- Best For Day Trading Strategy Alone [2023]

VWAP Indicator ?? Have you ever heard this name? Most likely you have heard!

But do you use it in day trading? Should you include it in your day trading strategy?

The very short and correct answer is – Yes, you should.

As you know intraday trading is the most risky but lustrous form of trading. Where you need effective tools that not only protect your trade but turn it into a profitable deal. For this, the VWAP Indicator is an amazing trading tool.

As a sincere trader, it becomes very important for you to know and use the VWAP indicator. Whether you do any type of trading such as stock trading, future trading, option trading, forex trading or commodity trading.

Many times you don’t pay much attention despite knowing that there are too many trading indicators and it sometimes causes more confusion as to which indicator you should use.

Let us know in detail about this indicator today. This is a very useful indicator for day traders.

Also I have written about the best combination of technical indicators for day traders. I think the approach is quite brilliant and you should read it.

But, if I talk about one of the most EFFICIENT technical indicators for intraday traders which is the best among many indicators, then VWAP is definitely the indicator.

It is such an intelligent indicator that not only gives information about the trend, but also the value of securities.

Volume Weighted Average Price (VWAP) Indicator

VWAP Full Form is the volume weighted average price.

You know that the price and volume of a security are the major concerns of technical analysis.

And this indicator includes the information and effect of both the volume and price of at a time.

Volume weighted average price is the average price of a security traded throughout the day.

It is pointless to talk about the utility of this indicator for long time horizons. It is best suited for intraday trading hours only.

I mean it works for the shortest duration like 1 minute, 5 minute and 15 minute chart, etc. It rarely works for hourly charts. But if you try to use it for 1 hour or more, VWAP actually loses its importance.

You should prefer anchored VWAP for swing trading, positional trading or long term investment.

VWAP Definition

In finance, volume-weighted average price is the ratio of the value traded to total volume traded over a particular time horizon (usually one day). It is a measure of the average price at which a stock is traded over the trading horizon.

Source: Wikipedia (see volume weighted average price section for more information)

VWAP Calculation

The concept behind the calculation of this indicator is similar to what you taught in academic classrooms to calculate the average or median of data using the summation rule ∑ (Sigma).

You can calculate this indicator by adding the product of each value of price and volume for a given period of time and then dividing by the sum of all volumes traded.

VWAP Formula

You can calculate the volume weighted average price value by the formula –

VWAP= (∑Price x Volume) /∑Volume

For example, suppose within one minute shares of a stock is traded like this-

Hence, the volume weighted average price value for one minute chart will be, 465,950/4,650 = 100.204.

VWAP Scanner

The VWAP scanner is nothing but the setting of this indicator on the technical chart along with other technical indicators. It gives you scanning capability, a clear view of the stock to look for a trading opportunity.

I will discuss this in another post.

VWAP Settings on The Technical Chart

Although you have knowledge of the formula, it is not practical to first calculate and then trade it.

Thanks to technologies and trading platforms that have made it easier to set volume weighted average price directly from the technical indicators list, the way other indicators are available on the chart.

If you open a chart of a specific stock on a trading platform such as TradingView, investingdotcom or where your trading account is open.

Then you need to type VWAP in the Technical Indicators box and then search. When you select a search result, it will display directly on the chart like a moving average.

It is a line that sometimes crosses the top or bottom of the displayed chart or sometimes above or below the price chart.

Anchored VWAP

I have discussed in post technical analysis that price acting as a support becomes resistance after sentiment reversal in a way. It is caused by human instincts. This basic instinct is called ‘anchoring bias‘.

Where you start to rely too much on the first piece of information you came across while making a decision. And then use that initial information to make future decisions.

In fact, it is the anchoring bias of investors and traders that has given rise to the concept of technical analysis as ‘price has a memory’. You can also feel it in Gap Up or Gap Down Theory.

AVWAP, the anchored VWAP tool, was developed by the late physicist and technical analyst, Paul Levine.

It is the most qualified tool because it combines information related to three elements at a time such as price, volume and time.

You have the option of obtaining a volume weighted average price curve for a certain time (user selected point) of your choice. And thus with the help of AVWAP you can create a separate VWAP lines.

Unlike volume weighted average price indicator, AVWAP is useful for long periods. AVWAP is a strong indicator that you can apply in any trading analysis or strategy.

There are several chart providers who have developed AVWAP tools in charts. Here I am giving the list for your convenience –

• TradingView
• Alphatrends Anchored Volume Weighted Average Price for Ninja Trader
• Yahoo Finance has a Free AVWAP

VWAP Indicator- Best Day Trading Strategy

Simply, you can think of this strategy like other strategies of using technical indicators. I would like to describe four situations to understand this strategy.

1. When the price of a security is below the volume weighted average price indicator line – The price position below the volume weighted average price line indicates various signals. If the price is far below the volume weighted average price line, the stock may be in an oversold zone. 

2. When the price of a security is above the volume weighted average price line – Also the price position above the volume weighted average price line indicates various signs. If the price is higher than the volume weighted average price line, the stock may be in an overbought zone.

Pro Tips– Other indicators such as Stochastic, RSI can help you make decisions in both situations.

3. When the price of a security surpasses the volume-weighted average price – This is a good opportunity to make a long position (to buy).

4. When the price of a security crosses below the volume-weighted average price – This is a good opportunity to create a short position (to sell).

Characteristics of the VWAP

Volume weighted average price, a trade confirmation tool, is often used in algorithmic trading as a way of predicting the stock market.

The following features of VWAP are described below as various trading signals –

• You can use it to find entry and exit prices.
• It also guides you to get support and resistance levels for the trade.

Volume Weighted Average Price line (Blue line) As Support

Volume Weighted Average Price line (Blue line) As Resistance

• You should always keep in mind that this indicator shows the balance of stock price. No matter whether the price is above or below the volume weighted average price. The higher the share price is away from the volume weighted average price, the higher the probability of its return. It acts like a rubber band.

Limitations of the VWAP

• This indicator is valid for a single day.
• It is a lagging indicator in the form of its calculation based on historical data starting on each new trading day.
• It is less reliable at the beginning and end of the day. Initially there is a lack of data while in the end it works slowly due to too much data feed.

Questionnaire

Who uses volume weighted average price?

Retail investors, institutional investors and mutual funds use this indicator. But the method of using them may vary.

Is it important for investors too?

Sure. Whether you invest in a low-priced share (Penny Stocks) or a high-value share, it is useful for everyone. But instead of volume weighted average price, you should use AVWAP for long term investment.

My Words

I do not think there are a perfect indicator alone for trading and investing in stocks.

However I believe and have found that volume weighted average price provides invaluable insight into the overall market or individual stock sentiment you are trading.

Overall, it is better to use a combination of some efficient indicators simultaneously.