The VWAP Strategy: The Fair Price of the Day
The line institutional buyers orient themselves around, and why it gives you a reference point too.
6 min read
The VWAP (Volume Weighted Average Price) is the volume-weighted average price of a trading day. Unlike a simple moving average, it accounts for how much was traded at each price. That makes it the "fair" average price that many institutional players align themselves with, since they often aim to enter or exit better than the VWAP.
For you as a trader, then, the VWAP is less a signal generator than a piece of context. When price trades above the VWAP, buyers have the upper hand on average; below it, sellers do. This simple orientation prevents a lot of poor decisions.
What the VWAP Tells You
The VWAP splits the day into two camps. Above the VWAP you tend to be on the buyers' side, below it on the sellers' side, which helps you avoid leaning against the dominant force of the day. Many day traders use it as a simple filter: long setups preferred above the VWAP, short setups preferred below it.
On top of that, the VWAP often acts as dynamic support or resistance in its own right. On a calm uptrending day, price keeps pulling back to the VWAP and bouncing off it, a classic and easily tradable pattern.
The VWAP Bounce as a Setup
The most common VWAP setup is the pullback bounce: in a trend, you wait for price to return to the VWAP and enter on a confirmation in the direction of the trend. The stop belongs on the other side of the VWAP, because once it is clearly broken, your assumption for the day no longer holds.
Context is key here. On trendless, choppy days price constantly oscillates around the VWAP, and the setup loses its edge. It comes into its own on days with a clear direction.
Common Mistakes
- ✕Trading the VWAP as a standalone signal, without considering trend and market condition.
- ✕Trading every VWAP touch on choppy, sideways days and getting ground down.
- ✕Carrying the VWAP across multiple days, when it is an intraday tool that resets each day.
- ✕Trading against a strong trend just because price is "far away" from the VWAP.
Put It Into Practice with FlowTrader
The VWAP is an excellent reference point for honest journaling. Note in FlowTrader whether your trades ran with or against the VWAP side, and the analysis often shows surprisingly clearly that trades against the VWAP contribute disproportionately to your losses. A small rule, a big effect.
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