Volume Weighted Average Price (VWAP)

What is VWAP?

• VWAP is defined as the sum of price times the volume at that price divided by the sum of total volume.
• It varies based on the time frame (e.g., one-minute chart vs. ten-minute chart).

Visual Representation

• VWAP appears as a line on charts, commonly on daily, one-minute, or three-minute charts.
• Important for determining trade direction and timing.

Using VWAP in Trading

• Key Strategy: Look for pullbacks to VWAP for entry points.
• Example:
  • For Ford, identify the long trend based on VWAP and moving averages.
  • Wait for a pullback to VWAP around significant levels (e.g., 12.75) to enter long positions.
  • Confirm the trade upon breaking back above VWAP after a test.

Trading Considerations

• VWAP can provide misleading signals during the first 10-15 minutes after market open due to initial prints.
• After this period, VWAP can help gauge the right time to enter trades.

VWAP and Institutional Trading

• Institutions use VWAP to gauge trade execution and buy/sell decisions without affecting stock price significantly.
• They aim to buy below VWAP and sell above it to secure better average prices.
• Understanding institutional behavior can give retail traders insights into potential price movements.

Example with Virgin Galactic

• When the price is below VWAP, it indicates aggressive buying from institutions.
• Traders should look for breaks above VWAP as potential buying signals.
• The blue line in the charts contrasted with VWAP represents a simple moving average.

Conclusion and Practical Application

• VWAP is a crucial tool for both retail and institutional traders.
• Key for understanding market direction and timing for trades.
• Regularly check VWAP levels for potential entry and exit points.