Volume Weighted Average Price (VWAP)

Introduction

• VWAP is a crucial trading tool for many traders, especially intraday traders.
• It helps traders make informed decisions regardless of their trading timeframe.

Definition of VWAP

• Formula:
  VWAP = (Sum of (Price × Volume)) / (Sum of Total Volume)
• Calculation varies based on the selected timeframe (e.g., 1-minute, 10-minute charts).

Visual Representation on Charts

• VWAP appears as a line on charts, often central to trading activity.
• It is commonly used with 1-minute or 3-minute charts.
• Example discussed: Ford's stock.

Trading Strategy with VWAP

1. Identifying Direction:

   • Analyze the stock's movement in relation to the VWAP line to determine trade direction.
   • Example: If a stock is above VWAP, consider long positions; if below, consider short positions.

2. Timing Trades:

   • Wait for pullbacks to VWAP before entering positions.
   • Avoid the first 10-15 minutes after market open as VWAP may not be accurate then due to significant initial volume.

3. Execution:

   • Begin to build positions when the price pulls back to VWAP.
   • Look for key levels (like 75, 50, and even numbers) near VWAP for entry points.
   • Hold positions with confidence until significant market indicators suggest otherwise.

4. Example with Ford:

   • Identified a bullish trend and waited for a pullback to VWAP at $12.75 before entering long.
   • After confirmation of price holding at VWAP, increased position sizes.

Importance of Institutional Use of VWAP

• Institutions use VWAP to execute large trades without significantly impacting stock price.
• They aim to buy shares below VWAP and sell above it to maintain favorable average purchase prices.
• Example with Virgin Galactic:
  • Institutions showed eagerness to buy when the price was below VWAP.
  • Analyzing the price movements in relation to VWAP can indicate institutional buying patterns.

Key Takeaways

• VWAP is a powerful indicator for determining trade entry points and understanding market sentiment.
• Recognizing how far the price is from VWAP can provide insights into potential future movements.
• Institutional behavior around VWAP can guide retail traders on potential trends and reversals in stock prices.

Conclusion

• Understanding and utilizing VWAP can enhance trading strategies, especially for intraday traders.
• Continuous learning about price movements in relation to VWAP is essential for effective trading.