Best Trading With VWAP Indicator Made Easy 2021 method

 The volume weighted average price (VWAP) is a trading benchmark used by traders that gives

the average price a stock has traded throughout the day, based on both volume and price.

It is important because it provides traders with insight into both the trend and value

of a security.

The Formula for the Volume Weighted Average Price (VWAP) is pretty simple.

You add up the dollars traded for every transaction (so, the price multiplied by the number of

shares traded) and then divide by the total shares traded.

On a chart, VWAP and a moving average may look similar.

These two indicators are calculating different things.

VWAP is calculating the sum of price multiplied by volume, divided by total volume, while

a simple moving average is calculated by summing up closing prices over a certain period (say

20), and then dividing it by how many periods there are (20).

Volume is not factored in.

The volume weighted average price (VWAP) appears as a single line on intraday charts (1 minute,

15 minute, and so on), similar to how a moving average looks.

Like moving averages, VWAP lags price because it is an average based on past data.

Despite this lag, you can compare VWAP with the current price to determine the general

direction of intraday prices.

It works similar to a moving average.

In general, intraday prices are falling when below VWAP and intraday prices are rising

when above VWAP.

So A rising VWAP, with the price above the VWAP line, means the price is likely in an

short term uptrend.

A declining VWAP, with the price below the VWAP line, means the price is likely in a

short term downtrend.

Also, don't rely on VWAP exclusively to determine trend, since it is only showing a historical

average, and not what is happening currently or in the future.

What Does Volume Weighted Average Price (VWAP) Tell You?

Large institutional buyers and mutual funds use the VWAP indicator to move into or out

of stocks with a market impact as small as possible.

They use VWAP to identify liquidity points.

The idea is not to disrupt the market when entering large buy or sell orders.

VWAP helps these institutions determine the liquid and illiquid price points for a specific

security over a very short time period.

Therefore, when possible, institutions will try to buy below the VWAP, or sell above it.

This way their actions push the price back toward the average, instead of away from it.

VWAP can also be used to measure trading efficiency.

After buying or selling a stock, big market players can compare their price to VWAP values.

A buy order executed below the VWAP value would be considered a good fill because the

security was bought at a below average price.

Conversely, a sell order executed above the VWAP would be considered a good fill because

it was sold at an above average price.

Retail traders, on the other hand, tend to use VWAP more as a trend confirmation tool,

similar to a moving average.

When the price is above VWAP they look only to initiate long positions.

When the price is below VWAP they only look to initiate short positions.

This is why day traders love the VWAP indicator, because more than often, the price finds support

and resistance around the VWAP.

Knowing that other traders and algorithms are buying and selling around the VWAP line,

if you combine the VWAP with simple price action, a VWAP strategy can help you find

dynamic support and resistance levels in the market.

Also, the likelihood of a VWAP line becoming a dynamic support and resistance zone becomes

higher when the market is trending.

So, for uptrends for example, look for higher highs and highs lows and pay attention at

the price action around the VWAP.

Here are a few reasons why so many top day traders love VWAP:

VWAP is a simple indicator: the price is either above it or below it.

When it comes to day trading, simplicity often rules.

It’s an easy measurement on whether a stock is cheap or expensive on the day.

You can use it to help you pinpoint intelligent entry and exit points for your day trades.

It can help you determine trend changes, often quicker than moving averages.

Now, how to trade with the VWAP?

You can use it for 2 types of trades: breakouts and pullbacks.

VWAP breakout setup is very simple but not what you may be thinking.

So a bullish breakout is when a stock’s price moves above a previously strongly held

resistance level, often with higher trading volume.

This can signal that traders are excited about this move and the stock may go on an extended

price run.

But we are not looking for a breakout to new highs but a break above the VWAP itself with

strength.

When it comes to a VWAP breakout, we look for periods when a stock price drops below

the VWAP.

This can often signal that buyers are exiting their long positions, which lowers the price

compared to the VWAP.

This can potentially be a good situation to look for a long trade, with the expectation

that the stock will soon bounce back and continue its upward movement.

Essentially, you wait for the stock to test the VWAP to the downside.

Next, you will want to look for the stock to close above the VWAP.

You will then look to buy above the high of the candle that closed above the VWAP.

Here are some examples of VWAP breakout trades.

Next is the VWAP Pullback trade.

A pullback is where a stock that’s on an extended move upward or downward makes a small

movement in the opposite direction.

Pullbacks are a common price movement, especially in heavy trends.

To trade a VWAP pullback setup, you have to find a stock that’s in a clear uptrend,

consistently making higher highs and higher lows.

The stock price makes a pullback to the downside, returning to the VWAP level on the chart.

This is a chance to buy the stock at the daily average price.

After you enter your long, you’re looking for price to continue its uptrend, gradually

pulling the VWAP up along with it.

Here are some examples of VWAP pullback trades.

Here’s an important tip: If you use longer-term charts, such as the 30-minute or 60-minute,

your VWAP data will greatly lag behind a shorter-term chart (like the 1-minute or 5-minute).

On a longer-term chart, the speed at which the VWAP generates a signal could mean that

you completely miss the move.

So, if you use VWAP, opt for the shorter-term charts.

Also, you have to be smart with where you place your stop-loss.

A common mistake is to place your stops few points below the VWAP.

You will be stopped out often of you place your stops close to the VWAP.

There’s a smarter way.

For instance, if you take a VWAP pullback trade, you should look to place your stop-loss

on the other side of a key chart level.

That level may be below a pivot point or previous strong support level.

That way, you can use the VWAP to try to keep trading in the right direction but maintain

a stop-loss at a logical level.

Alternatively, if there’s no major level, you can also look to keep your stock on the

other side of a recent swing point.

So if you’re long a stock that’s making higher highs and higher lows, you can place

your stop-loss just below the previous swing low.

The VWAP itself is a simple and effective indicator.

But that doesn’t mean you can just plug and play, then expect killer result.

The Volume Weighted Average Price (VWAP) has its limitations.

VWAP is considered a single-day indicator, and is restarted at the open of each new trading

day.

Attempting to create an average VWAP over many days could mean that the average becomes

distorted from the true VWAP reading.

Also, don’t forget that VWAP is based on historical values and does not have predictive

qualities.

VWAP serves as a reference point for prices for one day.

For this reason, it is best suited for intraday analysis.

Keep in mind that VWAP is a cumulative indicator, which means the number of data points progressively

increases throughout the day.

This is why VWAP lags price and this lag increases as the day extends.

Once you apply the VWAP to your day trading setup, you will soon realize that it is like

any other indicator.

There are some stocks and markets where it will pinpoint entries just right and in others

it will appear worthless.

That’s why, I encourage you to use the VWAP indicator in combination with price action,

so you can simplify your decision-making process and make better trades.

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