VWAP Day Trading & Scalping Strategies | Best Ways To Trade Stocks & Forex With VWAP


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. As always, if you learned something new, make
sure you subscribe, click the bell icon to enable notifications and leave us a like to
show your support. Until next time

15 Replies to “VWAP Day Trading & Scalping Strategies | Best Ways To Trade Stocks & Forex With VWAP”

  1. If you learned something new, make sure you Subscribe & Like this video (it only takes 5 seconds but will help us a lot)
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  2. Greetings, interesting tool the VWAP i'll definitely give it a try, thanks again for sharing your tips and knowledge

  3. Trade options are complicated derivatives. Don’t trade options before you fully understand how they work. In this video, time decay and volatility contraction were not mentioned and they could be the reasons of losing money even if the price goes in the right direction. If you’re a new trader/investor and watching this video, just take your time to ask yourself this question: how do I improve my trades to make better profits?

  4. An interesting video. Thank you sir Trading is all about having good results, to achieve that you need to be mentored the proper way.

  5. So basically "Some people go long if price is above VWAP" and "some people go short if price is above VWAP". Great! That helps a lot!

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