Updated: November 1, 2023. Written by Ross Cameron
What is the Volume Weighted Average Price (VWAP) Indicator?
The volume-weighted average price (VWAP) is a popular technical indicator that measures the average price of a stock. However, unlike a Simple Moving Averages. or even an Exponential Moving Average, the VWAP includes the volume traded.
Volume Weighted Average Price Formula
The calculation for VWAP is the average of (Average Price x Volume at Price) / Total Volume. The reason VWAP is popular is because it is the most accurate reflection of the average trading price of a stock. I think of it as the equilibrium point. If the price is above equilibrium, the bulls are in control. If the price is below, the bears are in control.
Why is Volume Weighted Average Price (VWAP) Popular for Day Trading?
The Volume Weighted Average Price (VWAP) is an indicator that is only available on intraday charts. It is not an indicator used by swing traders or by long-term investors. You’ll notice that on intraday charts VWAP is a powerful resistance point when the stock is trading below it (See Figure 1).
The bears remain in control if they can hold the stock below VWAP. They can hold a stock below a resistance level by selling short against that level. Likewise, the bulls will hesitate to establish new positions under a clear resistance level. I have used this technical indicator on my charts for over 10 years. I recently made a YouTube video describing it as one of the most important indicators I use.
Figure 1 shows the VWAP in Orange. In this example, the indicator shows it is being respected as a level of resistance. Once the stock price is below, it’s unable to reclaim that critical level.
When a stock trades above its Volume Weighted Average Price, the indicator serves as a support level (See Figure 2). It’s common to see stocks retrace back to the VWAP only to find traders like myself willing to buy off that level. If buyers step in and the stock does not break below VWAP, a level of support has been established. VWAP is respected in large-cap stocks like $AAPL, $TSLA, and $META, as well as mid-cap and small-cap stocks. If you are trading without using VWAP on your charts as an indicator you are blindfolding yourself to obvious support/resistance levels that other traders are using.
Figure 2 shows the VWAP in Orange.
VWAP Video Lesson – How to use VWAP
I recently wrote another article on The Top 4 Technical Indicators for Beginner Day Traders.
My Favorite Volume Weighted Average Price (VWAP) Breakout Trading Strategy
One of the strategies I’ve been trading for a long time is the Volume Weighted Average Price (VWAP) Breakout. In this strategy, as you can see in Figure 3, when a stock breaks over the VWAP it can produce a powerful move. The break of a significant resistance level in day trading causes bearish traders to close their short positions and bullish traders to establish new long positions. This sudden influx in trading activity can create an opportunity for traders interested in participating in the action.
In some instances, like in Figure 3, once the stock breaks over VWAP, it returns and retests that level. This is a critical time for the stock. If it can hold above VWAP, then that becomes psychological support, and the bulls are back in control.
Figure 3 shows the VWAP in Orange.
On stocks that have been heavily shorted, a break of VWAP can create a truly parabolic move where the stock goes nearly straight up and gets halted on a circuit breaker.
Figure 4 shows the VWAP as an orange dashed line.
The Correct Entry Point for a Volume Weighted Average Price Breakout Trade
Several of the biggest winning trades I’ve taken have been based on the VWAP breakout setup. This is a setup I teach during my Strategies & Scaling Day Trading Course for Warrior Pro Members. The early weakness under the VWAP accumulates short sellers looking for an all-day fade on a failing gapper. The sudden and powerful break of VWAP brings in long traders, but also forces a large amount of short covering. This means double or even triple buying vs. selling on the breakout. That’s a massive imbalance between supply and demand, and that’s what sends the stock up to new highs.
The entry point can be just below VWAP, but that is risky due to the likelihood of a fade off VWAP. A stronger entry is on the moment it surges through VWAP. However, this can be risky in the event that it becomes a bull trap and it immediately reverses. Alternatively, buying a 1-minute micro-pullback following a break of VWAP can prove safer. Sometimes these breakouts are so powerful the stock surges up into a circuit breaker halt as short sellers are trapped and getting squeezed. As always, this setup will perform best in a hot market, on a stock that meets all of my criteria for having home run potential.
The Profit Targets, Max Loss, and Risk Factors of VWAP Breakout Trades
I set a profit target on stocks under $20.00 a share at 10%. I’d like to see the stock go up 10% and make a move that sends the stock to a new high of day. As always, if I see a clear exit indicator, I will sell sooner.
My max loss has to be just below VWAP because if the stock can’t hold this level, it completely negates the setup idea.
The biggest risk factor is that if bearish traders can pull the stock back below VWAP the bulls will give up. I have to be cautious not to hold and hope if it doesn’t look good. The old saying “breakout or bailout” is important in this setup.
Volume Weighted Average Price (VWAP) Pullback Trading Strategy
What I like about this strategy, is that the stock is above the VWAP pretty much the entire time. The entry here is when the stock retraces back to the VWAP and proves it can hold that level of support. Sometimes the stock will dip below the VWAP just for a moment, as you can see in Figure 5, but immediately the bulls are able to defend that price and keep the stock above support.
The Entry for the VWAP Pullback Strategy
In this case, the entry will typically be based on a 5-minute bull flag pattern with a stop at the low of the pattern, just below VWAP. Other times the entry will be as close to VWAP as possible, with a stop just below support.
The Profit Targets, Max Loss, and Risk Factors of VWAP Breakout Trades
The profit target on this trade is that the stock curls off VWAP and re-tests high of day. In fact, if it’s really stock, we may even get 5-minute bull flags as it continues higher. Like with a VWAP Breakout Strategy, it’s very important that the stock is able to hold over this critical level of support. I will sell the position for a loss if the price breaks below support. Some traders put a stop loss a few cents above support so they won’t suffer as much slippage if the stock finally does break support. That’s not a bad idea, however, I typically don’t do this myself.
Unlike a VWAP Breakout Strategy, with the VWAP Pullback Strategy, the stock has already been above VWAP and naturally has more bullish support. These can be very powerful trades. However, the fact that the stock pulled back all the way to VWAP support can be a bit concerning. I’d like to see the stock have a strong underlying catalyst that will motivate the bulls to bid the stock back up to the highs.
FAQ’s
Is VWAP a good indicator?
Volume Weighted Average Price (VWAP) is one of the most popular indicators among active traders because it represents the point of control between the bulls and the bears. It is the equilibrium price of a stock during a trading session. When a stock is above VWAP, the bulls are in control. When a stock is below VWAP, the bears are in control.
If the stock is trading above VWAP and it declines down towards the VWAP price, the bulls will buy the stock off that level and defend VWAP as a support level.
Inversely, if a stock is trading below VWAP and rises up to the VWAP price, the bears will short against resistance and try to keep the stock below this level.
How do you calculate Volume Weighted Average Price (VWAP)?
Volume Weighted Average Price (VWAP) is calculated as (Average Price x Volume at Price) / Total Volume.
What time frame is best for VWAP?
Unlike other technical indicators, the VWAP is the same on all time frames because it’s the average price of all trades, including volume on the day. The amount of trading and volume on the day does not change between time frames.
Is VWAP better than Moving Averages?
If I had to choose just 1 indicator, I would tempted to choose VWAP. What makes VWAP essential is that it’s used by almost every active trader. To ignore it would be to trade blind to what almost everyone else is using.
Is VWAP Leading or Lagging?
Unlike MACD or Relative Strength Index, VWAP is not an oscillating indicator. However, like all moving averages, it does lag behind price. The reason traders use VWAP is that despite lagging, it shows the exact average price of a stock at any point during the day.