VWAP is the acronym for volume weighted average price. Whether you are new to trading or a professional trader, you will come across; day trade VWAP. VWAP is a trading indicator that calculates the average price of the stock based on how many shares were traded at different prices, and it’s usually calculated within a day time period. With the TD Ameritrade thinkorswim platform, you can turn on this indicator, so it can help guide you. Of course, a strategy would have to be used with it for it to be effective.
I help novice and experienced traders use the VWAP indicator to aid them in making successful trades. I also teach them the tested strategy to use to enter and exit trades effectively, which makes them profitable. Think of day trading as peanut butter and VWAP as jelly alone tastes delicious, but together they take your palette to the next level. The same applies to your trades once you take the MK VIP training program; you will be on another level. Combining my strategy and VWAP my students consistently see results in their trades.
Keeping it Simple
So many indicators and tools will come across your way, which can leave you confused and sometimes even overwhelmed. VWAP will start fresh every day. Volume is heavy in the first period after the markets open, therefore, this action usually weighs heavily into the VWAP calculation. Some might say that VWAP is not a very common indicator in the stock market. Yet some of the most traders on Wall Street use it. Volumes are one of the most essential concepts of the market. So, please keep it simple and focus on what truly is essential.
VWAP indicates who is in control of the price; which is either the buyers or the sellers. When a stock is traded above the VWAP, it means that the buyers are in overall control of the price and there is a buying demand on the stock. When a stock price breaks and close below the VWAP, it is safe to say that the sellers are gaining control over the price. A VWAP trading strategy can result in strong profits, but much of it depends on how the market is trending.
Doing the Math
If you wanted to calculate the VWAP line over a ten-minute time frame, you would:
1. Take the average price that the stock traded at over the ten-minute period and add the volume that was traded.
2. You would then divide this number by the cumulative amount of volume traded so far.
If the average stock price over the last ten-minutes is $25 and the volume is 1000 then you would get: 25 x 1000 = 25,000
You would then keep track of the total volume as you get through the day to get the cumulative volume. Which you would then divide the 25,00 above the cumulative volume. This shows how the current price and volume relate to the amount of volume traded so far. So, if the cumulative volume is so far 8,000; we would get a VWAP value of 3.125.
25,000 / 8,000 = 3.125.
You must be thinking 3.125 doesn’t mean much; but you have to watch how this develops as time passes throughout the day and compare it to prior days and prior time frames. A low VWAP indicated lower demand, and the price could be about to reverse back to where larger volumes of trades are settling. But a low or sharp change in VWAP could occur during a breakout move. In which price will shoot forward and the VWAP will eventually catch up.
Do the Hedge Funds Use It?
Fund managers and institutions use the VWAP to gauge the quality of their order fills. If they are constantly gelling filled above the VWAP, it may cause the manager to look for other trades to fulfill the orders. Institutions may want to get into a position, but the price they get in can make a market impact. The VWAP is also used to gauge liquidity and the market impact of institutional orders. If the trader is recklessly filling orders, it will cause shares to rise, triggering a steep drop once the orders are filled.
What Are the Other Two Bands?
VWAP bands are lines above and below the VWAP projected with multiples of the standard deviation. Think of it as Bollinger Bands with the VWAP as the middle band. You can use these bands for measuring the strength of the trend. The other two bands purpose are to tell you overbought and oversold levels. The Upper band (overbought level) is plotted a specified number of standard deviations above the VWAP, and the Lower band (oversold level) is plotted similarly below the VWAP. This can be seen in the image below; the upper band is pink, the VWAP is purple, and the lower band is yellow.
Summary: Day Trade VWAP
You have learned what VWAP is, how to use it, and how to do the math and that combined they affect trading decisions. You have also learned that the institutional traders use VWAP for trading opportunities as well, and you learned about the upper and lower bands. Furthermore, you also learned that a technical analysis tool is great, but without a strategy it means nothing. Remember that VWAP and strategy together are like peanut butter and jelly; taking your trading entry points to the next level.
Thankfully, you are in the right place because I can guide you. My goal has always been to help as many day traders achieve their personal financial goals, whether they are novice traders or experienced traders. The MK VIP training has plenty of resources to help you get started on reaching your day trading goals. With my program, you can learn how to incorporate VWAP and strategy. You will be profitable for at least 80% if not more of your trades.
Maurice Kenny has helped over 600 people become financially free through one-on-one coaching, mentorship, and options trading strategy. Many of these new traders are now full-time traders, and they all started by watching his 1-hr webinar.
Feel free to check out other FREE educational resources to help guide you as you begin your new journey to financial freedom.
Also, download a (FREE E-BOOK) by Maurice Kenny, “DAY TRADE LIKE A MILLIONAIRE.”