VWAP Trading Strategies
VWAP (Volume Weighted Average Price) is the benchmark institutional traders use to evaluate execution quality.
What is VWAP?
Definition
- Average price weighted by volume
- Resets each trading session
- Shows the fair value of the day
- Institutional benchmark for execution
Calculation
- VWAP = Cumulative (Price x Volume) / Cumulative Volume
- Weights periods with more volume more heavily
- Continuously updates throughout the day
VWAP Trading Rules
Trend Filter
- Price above VWAP = bullish intraday bias
- Price below VWAP = bearish intraday bias
- First cross of the day is significant
Support and Resistance
- VWAP acts as dynamic support in uptrends
- VWAP acts as dynamic resistance in downtrends
- Price often bounces off VWAP multiple times
VWAP Strategies
VWAP Bounce (Trend Following)
- Identify intraday trend direction
- Wait for pullback to VWAP
- Look for rejection candle at VWAP
- Enter in trend direction
- Stop beyond VWAP by a few ticks
VWAP Deviation Bands
- Standard deviation bands above and below VWAP
- First band: Normal range
- Second band: Extended (mean reversion zone)
- Third band: Extreme (strong mean reversion signal)
VWAP Cross Strategy
- Price crossing above VWAP = long signal
- Price crossing below VWAP = short signal
- Volume must confirm the cross
- Works best in trending sessions
Anchored VWAP
What It Is
- VWAP calculated from a specific point
- Anchor to: earnings, highs, lows, news events
- Shows average price since that event
How to Use
- Anchor to major swing low for support
- Anchor to major swing high for resistance
- Institutional traders watch these levels
VWAP for Different Traders
Day Traders
- Standard daily VWAP
- Trade bounces and crosses
- Primary tool for intraday
Swing Traders
- Weekly or monthly VWAP
- Anchored VWAP from key levels
- Longer-term fair value reference
Key Takeaways
- VWAP is the institutional fair value
- Trade in direction of VWAP position
- Bounces from VWAP are high-probability
- Use deviation bands for extremes
- Anchored VWAP reveals hidden levels
Lesson Discussion