VWAP (Volume Weighted Average Price) is one of the most important indicators for day traders and institutional investors. Unlike simple moving averages that treat all prices equally, VWAP weights each price by its trading volume, providing a more accurate representation of the true average price throughout the day. Understanding VWAP can help you trade alongside institutional money flow.
What is VWAP?
VWAP is the average price a security has traded at throughout the day, weighted by volume at each price level. It represents the benchmark price that institutional traders use to gauge whether they are getting good execution on their orders. A price below VWAP is considered a good price for buyers, while a price above VWAP is considered a good price for sellers.
Key insight: Institutional traders often use VWAP as their execution benchmark. When you see price hovering around VWAP, you may be trading alongside big money. This makes VWAP an essential tool for understanding institutional order flow.
How VWAP is Calculated
VWAP is calculated by adding up the dollar value of all trades and dividing by total volume:
VWAP Formula
VWAP = Cumulative (Typical Price x Volume) / Cumulative Volume
- Typical Price: (High + Low + Close) / 3 for each period
- Cumulative: Running total from the start of the trading day
VWAP resets at the beginning of each trading day and builds throughout the session.
Interpreting VWAP
Understanding VWAP levels helps you gauge market sentiment and potential support/resistance:
Price vs VWAP Relationship
- Price above VWAP: Buyers are in control; bullish intraday sentiment
- Price below VWAP: Sellers are in control; bearish intraday sentiment
- Price at VWAP: Equilibrium; no clear advantage for buyers or sellers
VWAP as Support and Resistance
VWAP often acts as a magnetic level that price gravitates toward:
- In uptrends, VWAP typically acts as support
- In downtrends, VWAP typically acts as resistance
- Price often retests VWAP multiple times during the day
VWAP Trading Strategies
Strategy 1: VWAP Pullback Trading
Trade pullbacks to VWAP in trending markets:
- In a strong uptrend, wait for price to pull back to VWAP
- Look for a bounce or bullish reversal pattern at VWAP
- Enter long with a stop below the pullback low
- Target the previous high or a measured move
VWAP Pullback Example
Stock XYZ gaps up on strong earnings:
- Price opens at $52 and runs to $55 in the first hour
- VWAP is building around $53.50
- Price pulls back to $53.50 (VWAP) and finds buyers
- Enter long at $53.60 with stop at $52.90
- Target: $55+ as trend resumes
Strategy 2: VWAP Breakout/Breakdown
Trade decisive breaks through VWAP:
- A strong break above VWAP after spending time below it is bullish
- A strong break below VWAP after spending time above it is bearish
- Look for volume confirmation on the breakout
- Failed breakouts/breakdowns can offer trades in the opposite direction
Strategy 3: Opening Range + VWAP
Combine VWAP with opening range strategies:
- Identify the opening range (first 15-30 minutes)
- If price breaks above the opening range high AND is above VWAP, go long
- If price breaks below the opening range low AND is below VWAP, go short
- VWAP alignment adds conviction to opening range breakouts
VWAP Bands (Standard Deviation Bands)
Many traders add standard deviation bands around VWAP for additional context:
- +1 and -1 SD: Normal trading range; price often oscillates within these bands
- +2 and -2 SD: Extended levels; price reaching these may be overextended
- Mean reversion: Price at outer bands often reverts toward VWAP
VWAP for Different Trading Styles
How to use VWAP based on your trading approach:
Day Traders
- Use VWAP as the primary trend filter for intraday trades
- Only go long when price is above VWAP; only short when below
- Use VWAP for entry timing on pullbacks
Scalpers
- Trade bounces off VWAP in both directions
- Use VWAP bands for quick mean reversion trades
- Watch for price to stall at VWAP for entry opportunities
Swing Traders
- Use anchored VWAP (starting from specific dates) for longer-term analysis
- Check daily closing position relative to VWAP for trend confirmation
- Use weekly or monthly VWAP for position trading
Anchored VWAP
While standard VWAP resets daily, anchored VWAP lets you start the calculation from any point:
- Earnings anchor: Start VWAP from earnings announcement date
- Significant high/low: Anchor from major pivot points
- IPO anchor: Track VWAP since a stock began trading
- Gap anchor: Start from significant gap days
VWAP Limitations
Be aware of these VWAP limitations:
- Intraday only: Standard VWAP resets daily, limiting longer-term analysis
- Lagging nature: VWAP becomes flatter as the day progresses, reducing usefulness late in the session
- Low volume issues: VWAP is less reliable in pre-market and after-hours trading
- Not predictive: VWAP shows where price has been, not where it will go
Common VWAP Mistakes to Avoid
- Using VWAP on daily charts: VWAP is designed for intraday use
- Ignoring context: VWAP works best in conjunction with overall market trend
- Trading every VWAP touch: Wait for confirmation patterns at VWAP
- Forgetting the reset: VWAP resets each day; yesterday's VWAP is irrelevant
Track Your Day Trading Performance
Pro Trader Dashboard helps day traders track their performance across different setups. Analyze your VWAP-based trades and see what works best for your strategy.
Summary
VWAP is an essential indicator for day traders that shows the true average price weighted by volume. Use it to identify trend direction, find support and resistance levels, and time entries on pullbacks. Remember that VWAP works best during regular trading hours and becomes less useful as the day progresses. Combine VWAP with price action and other indicators for the best results.
Want to learn more about volume-based indicators? Check out our guide on On-Balance Volume (OBV) or explore volume analysis trading.