Volume Weighted Average Price (VWAP)
The average price weighted by volume, showing the true average price paid by traders throughout the session.
Plain English Explanation
VWAP is the "fair price" of the day. It tells you what price most traders actually paid when you account for volume.
**Think of it this way:** If 1000 shares traded at $100 and 100 shares traded at $110, the simple average is $105. But VWAP would be closer to $101 because way more volume happened at $100.
**Why traders care:**
- **Above VWAP** = Buyers are in control, you paid more than average
- **Below VWAP** = Sellers are in control, you paid less than average
**Who uses VWAP:**
- Day traders use it as support/resistance
- Institutions use it to get good fill prices
- Algorithms often target VWAP for large orders
**Key insight:** Price often "reverts to VWAP" during the day - it's like a magnet for price.
How It Works (Technical)
VWAP is calculated by adding up the dollars traded (price × volume) for every transaction, then dividing by total volume. It resets at the start of each trading session and accumulates throughout the day.
When It Works Best
- Intraday trading (resets daily)
- High-volume stocks and futures
- Identifying fair value during the session
- Mean reversion strategies
- Timing entries in trending days
When It Fails
- Overnight positions (VWAP resets)
- Pre-market and after-hours trading
- Low-volume stocks (easily manipulated)
- Gap days (VWAP starts from gap price)
- Swing trading (daily VWAP less relevant)
Common Beginner Mistakes
- 1Using VWAP on daily/weekly charts (it's for intraday only)
- 2Expecting VWAP to work in low-volume stocks
- 3Ignoring the slope of VWAP (flat vs trending)
- 4Not considering the time of day (VWAP is most reliable mid-session)
- 5Fighting VWAP in strong trend days
Pro Tips
- Use VWAP standard deviation bands for mean reversion trades
- Price far from VWAP often reverts, especially mid-day
- In strong trends, VWAP acts as support/resistance
- Institutions often buy below VWAP, sell above it
- Combine with volume profile for stronger analysis
Related Indicators
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