To The Moon

What Is The VWAP?

Volume is one of the most important concepts in the market. A sharper move that is not supported by higher volume tends to be a sign of a false breakout. Therefore, as the name suggests, the average price weighted by volume (VWAP) is the average price of a financial asset that is weighted by volume.

Unlike other indicators like the Relative Strength Index and Stochastic, VWAP is not an indicator per se. It is a benchmark that is used together with other indicators. It is also commonly used by quantitative traders.

This indicator has been in use since 1984 when it was discovered by James Elkins, who was a trader at an investment firm known as Abel Noser, and it's one of the most useful tool for entry and exit points.

VWAP + Volume

The VWAP is a tool that is relatively popular among day traders. As the name suggests, the indicator primarily looks at the average price of an asset during a certain period and then finds its weighted volume.

The indicator typically tells traders the average price of an asset in a certain period. Therefore, it can be classified as a lagging indicator. The chart below shows the VWAP indicator added in the SPY chart on 3/21.

Price action above & below VWAP on SPY

How To Trade With VWAP Indicator?

The VWAP indicator is a lagging in nature just like the moving averages and the Parabolic SAR. This means that it uses historic data to predict the future performance of an asset. As a result, the more data you input into it, the more lag you will see.

- First, it is a relatively easy-to-use indicator unlike other complicated ones. All you have to do is to apply it in a chart and see the results.

- Second, VWAP is easy to interpret. Most traders identify it as being bullish when the price is below the VWAP and bearish when it is above the price. The reason for this is that during an uptrend, there is more pressure to buy the price.

- Third, it can be used to measure efficiency in the markets.

After the Cup & Handle breakout

The META chart above reflects price action successfully broke the Cup & Handle pattern and gapped up at pre-market (See post: 3/20 How to trade Cup & handle pattern: META). Use the VWAP to short as price action tried filling the gap when market opened yesterday. The second entry confirmation was the breakout above the VWAP after 2pm.

By far, the VWAP pullback is the most popular setup for day traders hoping to get the best price before a stock continues higher.

Remember, day traders have only minutes to a few hours for a trade to work out. To that end, the closest entry at a support level can mean the difference between success or failure in a trade.

On the other hand, the VWAP breakout setup is not what you may be thinking. Instead of looking for a breakout to new highs, what we look for is a break above the VWAP itself, ideally with strength.

Breakout of Ascending Triangle

AAPL broke out of the Ascending Triangle at 156.54 after the fifth attempt (See post: 3/20 How to trade the ascending triangle + Inverse head & shoulders: AAPL) . The retest yesterday confirmed the bullish sentiment to takeon 159.4 at its peak. Enter after VWAP confirmation can reap about 20% profit within 2 hours.

⚠️ The most popular way for me to use the VWAP indicator is to combine it with other indicators such as the Parablic Sar (See post 3/21: How to trade with the Parablic Sar), 200 SMA, Volume and my daily trade level posted as a trigger point.

The volume weighted average price is not a very common indicator in the market. In fact, very few traders know anything about it. Still, it is used by some of the most experienced intraday traders in Wall Street.

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