Volume-weighted Average Price (VWAP) is a technical indicator typically used to indicate the direction of intraday moves. As the name suggests, VWAP uses volume as a factor in calculating the Average Price of an asset and puts more emphasis on price points with bigger volume. It’s quite similar to other moving averages, especially when it comes to the interpretations.
How to Use VWAP
VWAP is used by traders to eliminate the noises that interfere with their chart interpretation. By looking at a VWAP, traders know how a stock trades on a particular day, and if a trading decision is to be made, what price levels are considered good.
Volume Weighted Average Price is particularly helpful in intraday chart analysis because it uses intraday data in its calculation. However, one must keep in mind that like other moving averages, VWAP is a lagging indicator. The closer it gets to the end of the trading day, the bigger the lag. Click this link to access an economic calendar for your trading strategiesVolume-weighted Average Price (VWAP) Click To Tweet
Volume Weighted Average Price is good for identifying and confirming an existing trend.
- When price trades above the VWAP, the bullish trend is strong and a long position can be established.
- When price trades below the VWAP, the bearish trend is dominating the market.
Support and Resistance Levels with VWAP
The Volume Weighted Average Price line can be used to identify support and resistance levels for an asset. If the price is currently trading above VWAP but approaches it without breaking below it, a support level could be marked at the point where price touches the VWAP line. The more times the price touches the VWAP line without invading it, the stronger the uptrend is. The opposite is true for a bearish market where price trades below the VWAP line. Once price breaks through the VWAP line, it’s a signal that the current trend is coming to an end.
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