VWAP is a trading indicator that represents volume-weighted average price and is one of the many numbers that can be helpful in your day trading analysis. While no indicator alone can guarantee a trade going your way, using VWAP can add more depth to your process and help you find an edge as a day trader.
VWAP is the calculation of the sum of price multiplied by volume and then divided by total traded volume. You can have the calculations automatically done for you if you add VWAP to your intraday chart. That will allow you to see a line that represents this indicator.
At some point, the VWAP line may be above or below the current stock price; one may use its position as the indication of who’s in control. If the stock price is above VWAP, it means that bulls are in control. And when the VWAP line is above the stock price, it means that bears are in control.
If the stock overextends itself and gets very far away from VWAP, it can be used as an indication to short the stock with the expectation of having it come back closer to the VWAP line. The same goes for the opposite. So if the current price is way below VWAP, some traders buy the dip in the hope of selling the stock back when it gets closer to the line.
Another way of utilizing this indicator is using it as bias control. If you decide to approach the stock on the bullish side, yet you see that the price is moving under the VWAP line, that may be your signal to get out of the long position or short this stock instead.
But it doesn’t always work perfectly that way. Many times you have to look at several indicators before making a judgment about your trade.
It is important to understand this indicator because many traders use it as part of their trading rules for determining intraday trends. However, no single indicator will make you a profitable trader all by itself.
Additionally, it’s fine not to have VWAP on your chart if you are confident in using other criteria for your rules. Treat all indicators that you have access to as guides, and see where they take you. But if you’ve never used VWAP before, consider adding it to your charts and take some time to observe how the price moves against it. Don’t rely on it to make any conclusions just yet; simply see if you can notice any patterns. With time, VWAP may add another dimension to your decision-making process and become one of the rules that help you trade better.
If you want to learn more about day trading, check out our resources and video guides. And if you have any questions regarding opening an account with Cobra Trading, feel free to reach out via live chat, phone, or e-mail.