Volume Weighted Average Price (VWAP) is an intraday indicator that shows the average price of an asset based on both volume and price. It gives more weight to prices with higher trading volumes, making it a reliable benchmark for the true average price throughout the trading session. VWAP is widely used by day traders and institutions to evaluate trade quality, track price trends, and identify entry or exit points during the day.
Significance
- Reflects the true average price by factoring in both price and volume.
- Used as a benchmark by institutional traders for trade execution quality.
- Acts as dynamic support or resistance in intraday trading.
- Helps identify price direction relative to the average trading activity.
- Valuable for intraday trading, not typically used on longer timeframes.
Indicator Components & Values
- VWAP Line → Plotted as a single line that resets daily and moves with volume-weighted price.
- Price-to-VWAP Relationship →
- Price above VWAP → Bullish sentiment, buyers in control.
- Price below VWAP → Bearish sentiment, sellers in control.
- No fixed overbought/oversold levels → Interpretation depends on price position relative to VWAP.
- Daily Reset → VWAP starts fresh at the beginning of each trading session.
Trading Strategy
- Trend Confirmation → Trade in the direction of the trend when price stays above or below VWAP.
- Mean Reversion → Buy when price dips below VWAP and returns above it; sell when it rises above and drops back below.
- VWAP Bounce → Enter trades on pullbacks to VWAP in a trending market.
- VWAP Breakout → Enter when price decisively breaks above or below VWAP with strong volume.
- VWAP + RSI/Moving Average → Combine with momentum or trend indicators to confirm entries or exits.
