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TA Challenge: VWAP, the "golden indicator" for intraday trading
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bullrider_21 joined discussion · Apr 3, 2023 23:57

TA Challenge: VWAP

What is VWAP?
The Volume Weighted Average Price (VWAP) is a technical indicator that measures the average price of a security based on both the price and volume of trades over a specified period.
VWAP slope
VWAP is typically used with intraday charts as a way to determine the general direction of intraday prices. VWAP is similar to a moving average in that when price is above VWAP, prices are rising and when price is below VWAP, prices are falling. When VWAP is flat, prices are ranging or trading sudeways. VWAP is primarily used by technical analysts to identify market trends.
These are shown in the figures below.
Fig. 1. Uptrend.
Fig. 1. Uptrend.
Fig. 2. Downtrend.
Fig. 2. Downtrend.
Fig. 3. Trading sideways.
Fig. 3. Trading sideways.
A trader buys a stock below the VWAP and sells it above the VWAP. So he gets better than average prices.
Day traders use the VWAP to determine levels of support or resistance. If price is trading above VWAP and comes back to it, a day trader might look for it to act as support. If price is trading below VWAP and trades back up into it, a short-term trader might look for it to act as resistance.
VWAP crossover
Retail traders look for crossovers between the VWAP and the price as a trading signal. When the price crosses over the VWAP from below to above, the next candlestick price that closes above VWAP will initiate a long position. And when the price crosses over the VWAP from above to below, the next candlestick price that closes below VWAP will initiate a short position.
Fig. 4. VWAP crossovers.
Fig. 4. VWAP crossovers.
Institutional traders
Institutional traders use the VWAP to move into and out of stocks with a minimal price impact, as well as to gauge when price is too extended. For example, they may buy below the VWAP or sell above the VWAP to push the price back to an average instead of away from it. They may also break up a large order into several smaller orders. These help them to maintain an orderly market.
Pros of using VWAP
The VWAP is the true average price of the stock and does not affect its closing price.
1) VWAP can indicate if the market is bearish or bullish.
2) In VWAP, the indications to buy and sell are prominent.
The traders who use the VWAP line as an indicator will be able to buy at a low price, thus, getting more favourable returns when they sell the stock. Hence, VWAP helps the investor make an informed decision.
3) VWAP can be combined with another technical indicator to confirm a trend, using such multiple indicator strategies can considerably reduce the number of false signals.
Cons of using VWAP
1) VWAP is a single-day indicator and restarts at the open of each new trading day. Attempting to create an average VWAP over many days could distort it and result in an incorrect indicator.
2) While some institutions may prefer to buy when the price of a security is below the VWAP, or sell when it is above, VWAP is not the only factor to consider. In strong uptrends, the price may continue to move higher for many days without dropping below the VWAP at all or only occasionally. Therefore, waiting for the price to fall below VWAP could mean a missed opportunity if prices are rising quickly.
3) VWAP is based on historical values and does not inherently have predictive qualities or calculations. VWAP is anchored to the opening price range of the day. Therefore, the indicator increases its lag as the day goes on.
VWAP and MACD
The VWAP can be used with other indicators such as the MACD to confirm a trend.
Fig. 5. VWAP and MACD.
Fig. 5. VWAP and MACD.
The bullish MACD crossover confirmed the uptrend and gives a buy signal.
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