Mastering VWAP Trading: Strategies & Examples for Efficient Trading

Volume Weighted Average Price (VWAP)

What is VWAP?

VWAP, or Volume Weighted Average Price, is a popular moving average indicator used by traders and chartists. VWAP is simply a moving average based on volume and price rather than time.

This indicator is valuable for retail traders, institutional traders, and market makers, serving multiple purposes. VWAP is typically displayed as a moving average line on an intraday chart, representing the price value traded over the total volume.

How is VWAP Calculated?

VWAP is calculated by taking the average of the high, low, and close prices for a given time period and then weighting that average by the total volume traded during that period. As the trading day progresses, the formula is continuously updated for each time period to maintain the VWAP line. Simply, VWAP = Cumulative Price x Volume/Cumulative Volume.

Who uses VWAP ?

VWAP is a crucial tool for various market participants:

• Intraday Traders: They use VWAP as a trend indicator to guide their trading decisions through intraday market structure.
• Money Managers and Institutions: They use VWAP as a benchmark to assess the quality of executions by their traders or market makers.
• Hedge Funds and Algorithmic Traders: They integrate VWAP into their trading systems for various strategies, taking advantage of its widespread recognition and potential self-fulfilling influence to, for example, adapt their risk management rules.

What are the best types of VWAPs?

1. Time-Based

• Definition: This is the traditional VWAP calculation where the average price is weighted by volume over a specified time period, typically from the start of the trading day.
• Usage: It’s commonly used to assess the average price at which a security has traded throughout the day. Traders use this to determine if a security was bought or sold at a good price relative to the day’s volume-weighted average.
• Characteristics: Resets daily, providing a fresh benchmark each trading day. It helps in intraday trading strategies to gauge market sentiment or price efficiency.

2. Anchored

• Definition: Unlike the standard VWAP that resets each day, the Anchored VWAP starts from a specific starting point in time chosen by the trader, making it discretionary. This aspect of discretion brings a lot of use-cases and make this VWAPS adapted to many different scenarios.
• Usage: It’s particularly useful for analyzing the price action relative to key events. For example, a trader might anchor the VWAP to the time a stock split was announced to see how the price has performed since that event, taking into account the volume traded at various prices.
• Characteristics: Provides a longer-term perspective compared to daily VWAP. It can span across multiple days, weeks, or even months, depending on when the anchor is set.

3. Rolling

• Definition: This type of VWAP calculates the volume-weighted average price over a moving window of time. Instead of starting from a fixed point like the market open or an anchored event, it continually updates by adding the most recent period’s data and dropping the oldest.
• Usage: Rolling VWAP is used for dynamic analysis, where the trader wants to understand the recent trend in price efficiency or market sentiment. It’s particularly useful in algorithmic trading or in market which never closes such as Cryptocurrencies market.
• Characteristics: It’s adaptive, reflecting the most current market conditions more closely than a fixed time-based or anchored VWAP. The length of the rolling period can be adjusted (e.g., last 100 trades, last hour, etc).

Where can I find VWAPs indicator ?

You can use the MVWAP or VWAP indicator directly on Runbot.io website where you can configure it the way you like, in the chart box, by adding the indicator.

Others options are softwares such as : TradingView, ATAS, SierraChart.

How can I develop a VWAP trading strategy ?

The Auction Market Theory or order flow concepts haven’t gained the hype from YouTubers and trading influencers, but VWAP certainly has, marketed as the next trading secret to master.

VWAP has to be used as a tool, in order to develop an efficient VWAP trading strategy you have to know your trading timeframe. The strategy will completely change if you want to trade your asset through intraday market structure in a 1-5 minutes timeframe or as a swing trader on hourly timeframes.

Despite its mixed reputation, VWAP is a valuable indicator. For scalping and intraday trading, I like to load the Daily VWAP with its standard deviation bands. For swing trading, I usually refer to yearly or weekly VWAPs. As showed below.

Yearly and Weekly VWAPs on Bitcoin acting as a resistance and support.

VWAP is widely monitored by traders, making it essential for your trading strategy. However, don’t trade it blindly. Use patterns and overall context when trading around VWAP. The break-and-retest strategy (FTR) works best in this scenario.

In the trading example below, BTC’s price stays below daily VWAP throughout the session, preventing us from trying to catch a falling knife and focusing on shorting instead. Longing trying to find an eventual bottom is usually not a good edge while the price is under the VWAP.

BTC is rejected under daily vwap, indicating downtrend

If you struggle with trying to catch market tops or bottoms, implement a rule to only go long above VWAP and short below it. Alternatively, you can use 2-standard deviation bands. These bands act as developing value throughout the day, adhering to the same Auction Market Theory rules. Price tends to rotate within these bands or reject them during trends, with the VWAP being the most critical level.

A good daily trading strategy would be to bid extreme bands of daily VWAP, place bid on lower band, ask on upper bands then wait for the price to visit those levels, as it is on this example below :

Intern’s Pro VWAP tips :

• You can gauge average entry by anchoring VWAP to an open interest bottom, and based on the OI decrease above the line, sellers are showing their hand: They want to get out with as low of a PNL hit as possible.

• Anchor your VWAP on ATH, swing low/high or even Open Interest spikes, it will help you to highlight key areas.

• Supply and demand are not aligned at predetermined timed closes but rather at points where significant volume is exchanged. While specific time bucketed closes are reflected by moving averages (MAs), the real exchange of supply and demand is captured by the VWAP.

• On the beginning of your trading session, identify in which phase your asset is, either range or trending phase. In range, orders on the extremes, on trends, buy or sell retests.

Conclusion

VWAP is a powerful and versatile trading tool, widely used by intraday traders, money managers, institutions, and algorithmic traders. As a moving average that incorporates volume.

VWAP’s main advantage lies in its ability to combine both price and volume, providing a more accurate representation of an asset’s average traded price. This makes it an essential tool for identifying key support and resistance levels, evaluating market trends, and determining whether an asset is trading at a fair value. For beginners, VWAP is especially insightful as it offers clear guidance on entry and exit points, helping them avoid common pitfalls like chasing price movements. By integrating VWAP into their trading strategies, newcomers can make more informed and disciplined trading decisions.

To leverage VWAP effectively, consider using trading platforms like Runbot.io, TradingView, or SierraChart, and always remember to combine VWAP analysis with other indicators for the best results.