The #1 Trading Indicator on TradingView

Summary

In this video, the speaker dives into the power of the VWAP (Volume Weighted Average Price), explaining why it is one of the most effective trading indicators. The VWAP takes volume into account, offering a more accurate price reflection than simple moving averages. The speaker emphasizes its importance for day trading, acting as both support and resistance, and how many institutional traders use it for liquidity. The video also provides a strategy to increase win rates using the VWAP alongside the 200 moving average, cautioning against false breakouts and the need for multiple indicators in trading.

Takeaways

• 😀 The VWAP (Volume Weighted Average Price) is a powerful trading indicator that accounts for both price and volume, making it more accurate than simple moving averages.
• 😀 Many traders overlook the VWAP, but it's highly valuable for day trading and scalping because it helps identify key price levels.
• 😀 VWAP can act as both a support and resistance level, depending on whether the price is above or below it.
• 😀 Institutional traders, such as mutual funds and banks, place orders around the VWAP because it represents high liquidity and minimizes market impact.
• 😀 Price often respects the VWAP, especially the first time it touches the line, making it a reliable guide for potential reversals.
• 😀 VWAP is an intraday indicator and isn't meant for long-term investing, as it uses intraday data (price and volume).
• 😀 The first time the price touches the VWAP is typically the most reliable, and the support or resistance it provides weakens as price continues to touch it.
• 😀 False breakouts can happen when price briefly breaks through the VWAP, but these are often followed by price retracing back. The VWAP should be seen as a guide, not an exact science.
• 😀 To improve the reliability of the VWAP, traders should combine it with other indicators, such as the 200-period moving average, to reduce false breakouts.
• 😀 A key strategy for using the VWAP effectively is only trading in the direction of the broader trend, as indicated by the 200 moving average, to avoid false signals and increase win rate.
• 😀 The VWAP is not a standalone indicator, and traders should always use multiple indicators to make more informed trading decisions.

Q & A

What is the VWAP and how is it different from a regular moving average?

The VWAP (Volume Weighted Average Price) is an upgraded version of a regular moving average. Unlike a standard moving average that only considers price, the VWAP incorporates volume into its calculation, making it a more accurate reflection of market activity. This is why it’s seen as more effective in trading.

Why is volume considered important in trading?

Volume is crucial in trading because it provides insight into the strength of a price move. More volume means higher market participation, which can indicate a stronger trend or reversal. In the case of VWAP, volume influences the price level more heavily than just the price itself.

What makes the VWAP particularly effective for traders?

The VWAP is particularly effective because it reflects the average price at which most trading activity has occurred, factoring in both price and volume. It is widely used, which means a large number of traders are watching the same level, making it more likely for the price to respect it as support or resistance.

What role does VWAP play in institutional trading?

Institutional traders, such as banks and mutual funds, use the VWAP to place their orders because it typically represents the price with the highest liquidity. Trading around the VWAP allows these institutions to enter and exit positions with minimal market impact.

How does the VWAP confirm the trend direction in day trading?

The VWAP helps confirm the trend direction by showing whether the price is above or below it. If the price is above the VWAP, it indicates an uptrend, while a price below the VWAP suggests a downtrend. This can guide traders in identifying the market’s general direction.

How does the first interaction with the VWAP affect price action?

The first time the price touches the VWAP is often the most significant. Price usually respects the VWAP on the first touch, either bouncing off it or using it as a resistance. As time progresses, however, the likelihood of price breaking through the VWAP increases.

Why does price tend to revert toward the VWAP after large price movements?

Price often reverts to the VWAP after large movements because the VWAP acts like a magnet. If the price spikes too far above or below the VWAP, there is a natural tendency for it to revert back toward the VWAP, reflecting the balance of price and volume.

What are the common drawbacks of relying solely on the VWAP?

One of the main drawbacks of the VWAP is false breakouts, where the price breaks through the VWAP level temporarily before reversing back. Additionally, since VWAP is an intraday indicator, it is not suitable for longer-term trading or investment decisions.

How can traders enhance the effectiveness of the VWAP?

Traders can enhance the VWAP’s effectiveness by combining it with other indicators, such as the 200-period moving average. For example, only taking trades when the price is above the 200-period moving average can filter out false breakouts and improve the win rate in an uptrend.

Why should traders not rely on a single indicator like the VWAP?

No single indicator is foolproof. While the VWAP can be effective in certain scenarios, it should be used alongside other tools to confirm signals and avoid potential false breakouts. Indicators are not an exact science and should be treated as guides rather than guarantees.