VWAP, or Volume Weighted Average Price, is one of the most important indicators for day traders. Institutional traders use VWAP to benchmark their executions, and retail traders use it to identify trend direction and find optimal entry points. Understanding VWAP can significantly improve your day trading results.
What is VWAP?
VWAP is the average price a stock has traded at throughout the day, weighted by volume at each price level. Unlike simple moving averages that only consider price, VWAP gives more weight to prices where more shares traded.
The formula: VWAP = Cumulative (Price x Volume) / Cumulative Volume. In simple terms, it is the true average price that all traders paid for the stock that day.
Why VWAP Matters
VWAP is significant for several reasons:
- Institutional benchmark: Large funds measure execution quality against VWAP
- Fair value reference: Shows the average price paid by all market participants
- Trend filter: Price above VWAP suggests bullish, below suggests bearish
- Support and resistance: VWAP acts as dynamic support or resistance
- Self-fulfilling prophecy: So many traders watch VWAP that it often works
VWAP as Trend Direction
The simplest way to use VWAP is as a trend filter:
Price Above VWAP
- Indicates bullish intraday trend
- Buyers have been more aggressive than sellers
- Look for long entries on pullbacks to VWAP
- Avoid shorting when price holds above VWAP
Price Below VWAP
- Indicates bearish intraday trend
- Sellers have been more aggressive than buyers
- Look for short entries on bounces to VWAP
- Avoid going long when price holds below VWAP
Trend Filter Example
Stock ABC opens at $50, gapping up on earnings:
- VWAP starts at $50 and price stays above it all morning
- Every dip toward VWAP finds buyers
- This confirms the bullish bias from the gap
- Traders should focus on long setups only
- Avoid shorting until price clearly breaks below VWAP
VWAP Trading Strategies
1. VWAP Bounce (Pullback Entry)
Buy pullbacks to VWAP in an uptrend:
- Confirm price is above VWAP (uptrend)
- Wait for price to pull back toward VWAP
- Look for a bounce with bullish candle confirmation
- Enter long when price starts moving away from VWAP
- Stop loss below VWAP or below the pullback low
- Target prior highs or 2:1 risk-reward
2. VWAP Fade (Mean Reversion)
Fade extended moves back to VWAP:
- Price moves far away from VWAP (extended)
- Look for exhaustion signs (volume spike, doji candles)
- Enter in direction of VWAP (short if above, long if below)
- Target VWAP as your profit level
- Stop loss beyond the recent extreme
3. VWAP Break and Retest
Trade the reclaim or break of VWAP:
- Price breaks through VWAP with conviction
- Wait for price to pull back and test VWAP as new support/resistance
- If the level holds, enter in the breakout direction
- Stop loss on the wrong side of VWAP
- Target based on range or prior levels
VWAP Bounce Trade Example
Stock XYZ is trading above VWAP at $45, VWAP at $44:
- Price pulls back from $45.80 toward VWAP
- At $44.20, a hammer candle forms
- Entry: Buy at $44.40 when hammer high breaks
- Stop loss: $43.80 (below VWAP and hammer low)
- Target: $45.60 (prior high area)
- Risk: $0.60, Reward: $1.20, R:R 2:1
VWAP Standard Deviation Bands
Many traders use standard deviation bands around VWAP:
- First band (+/- 1 SD): Price often reverses here in ranging markets
- Second band (+/- 2 SD): Extended level, high probability of mean reversion
- Third band (+/- 3 SD): Extreme extension, strong reversal signal
Trading with VWAP Bands
- Buy at lower bands in uptrends, sell at upper bands in downtrends
- Fade extreme moves that reach 2nd or 3rd standard deviation
- Use bands as profit targets when trading from VWAP
Combining VWAP with Other Indicators
VWAP + Moving Averages
- Use 9 EMA and 20 EMA with VWAP for trend confirmation
- All three aligned in same direction: Strong trend
- Price above all three: Aggressive longs
- Price below all three: Aggressive shorts
VWAP + RSI
- VWAP bounce + oversold RSI = Higher probability long
- VWAP rejection + overbought RSI = Higher probability short
- RSI confirms momentum at VWAP levels
VWAP + Volume
- High volume at VWAP test = Important level
- Low volume at VWAP = Less significant
- Volume spike on VWAP break = Likely real move
VWAP Anchored to Events
Advanced traders anchor VWAP to specific events:
- Earnings VWAP: Anchored to earnings announcement date
- High/Low of Day VWAP: Anchored to the day's high or low
- Weekly VWAP: Shows average price for the entire week
- Event-anchored VWAP shows institutional activity around specific catalysts
Common VWAP Trading Mistakes
- Trading against VWAP trend: Going long when price is clearly below VWAP
- Using VWAP on longer timeframes: VWAP is an intraday indicator only
- Ignoring time of day: VWAP is less reliable in low-volume afternoon sessions
- No confirmation: Entering just because price touched VWAP without reversal signals
- Too tight stops: VWAP is a zone, not a precise line, give room for noise
- Overcomplicating: Adding too many indicators instead of mastering VWAP first
Track Your VWAP Trades
Pro Trader Dashboard helps you analyze which VWAP setups work best for your trading. See your performance statistics by strategy type and improve your execution.
Best Times to Trade VWAP
- Market open (9:30-10:30 AM): VWAP is forming, high volume, clear direction
- Mid-morning (10:30 AM-12:00 PM): VWAP established, good bounce opportunities
- Afternoon (2:00-4:00 PM): VWAP becomes more significant as day's average solidifies
- Avoid lunch (12:00-2:00 PM): Low volume, choppy price action around VWAP
VWAP Trading Checklist
- What is the overall VWAP trend today (price above or below)?
- Is price currently at, near, or far from VWAP?
- Am I trading with or against the VWAP trend?
- Is there a clear reversal signal at VWAP?
- Does volume confirm the move?
- Where is my stop loss (should be on wrong side of VWAP)?
- What is my profit target?
- Is this a good time of day for VWAP trades?
Summary
VWAP is an essential indicator for day traders because it shows the true average price weighted by volume. Use it as a trend filter (trade longs above VWAP, shorts below), for entries on pullbacks, and for mean reversion trades when price extends far from VWAP. Remember that VWAP is an intraday indicator and works best during high-volume trading periods. Combine it with price action and volume confirmation for the best results.
Expand your trading toolkit with our guide on Level 2 trading or learn about tape reading.