The only 'VWAP' video you will ever need | VWAP Indicator | VWAP Bands Strategy | VWAP Trading

Summary

This video explores the VWAP (Volume Weighted Average Price) indicator, explaining why it's a popular tool for short-term traders and institutions. The video covers VWAP’s calculation, its use as a benchmark for trading performance, and how it can help identify support, resistance levels, and market trends. It also discusses the importance of VWAP bands, its advantages over other indicators, and strategies like pullback, reversal, and mean reversion. The video emphasizes using VWAP with price action and volume, while also highlighting its limitations as a lagging indicator.

Takeaways

• 📊 VWAP (Volume Weighted Average Price) is a popular benchmark indicator that compares a stock's average price to the total volume traded during the day.
• 🏦 VWAP is widely used by institutional traders to identify good entry and exit points in the market, especially when dealing with large positions.
• 📉 VWAP is an intraday indicator used to establish support and resistance levels and helps traders decide whether to adopt an active or passive approach.
• ⏳ Since VWAP is cumulative and not periodic, it provides a complete picture of the market over the trading session, unlike moving averages that only consider recent candles.
• 🧲 VWAP can act like a magnet, either attracting or repelling price movements, depending on the market conditions.
• 💡 VWAP’s inertia makes it more reliable in reflecting meaningful price movements, filtering out random oscillations and providing better context than short-term indicators.
• 📈 VWAP is useful for identifying market trends: prices staying above it indicate a bullish trend, while prices below suggest a bearish trend.
• 📉 VWAP bands, similar to Bollinger Bands, can help traders gauge volatility and identify potential buy and sell zones based on standard deviations.
• ⚠️ A disadvantage of VWAP is its lagging nature, as it becomes less responsive later in the trading session, making it less effective for timing market entries.
• 🔄 The video covers three key VWAP trading strategies: pullback, reversal, and mean reversion, each designed for different market conditions and trading approaches.

Q & A

What does VWAP stand for and how is it commonly used?

VWAP stands for Volume Weighted Average Price. It is commonly used as a benchmark indicator to evaluate the average price of a stock compared to the total volume of shares traded over a particular time frame. VWAP is frequently used by short-term traders and algorithm-based trading programs.

Why is VWAP considered a popular indicator among institutional traders?

VWAP is popular among institutional traders because it helps them trade large volumes of shares without causing significant market disruption. By comparing their buy or sell orders to the VWAP, they can assess whether they are trading at a good price relative to the day's average.

How is VWAP calculated?

VWAP is calculated using the cumulative typical price (the average of high, low, and close prices) multiplied by the volume, divided by the cumulative volume. The formula only uses intraday data, and it adjusts in real time throughout the trading session.

What is the main difference between VWAP and periodic indicators like moving averages?

The main difference is that VWAP is cumulative, factoring in all price and volume data from the start of the day until the current time. In contrast, periodic indicators like moving averages only consider a fixed number of bars (e.g., the last 9 or 20) and do not capture the full intraday picture.

Why is VWAP considered a lagging indicator?

VWAP is considered a lagging indicator because it relies on historical price and volume data, which means it reflects past market activity rather than predicting future movements. As the trading session progresses, VWAP becomes less sensitive to recent price changes, resulting in 'progressive lag.'

What are some key uses of the VWAP indicator in trading?

Key uses of VWAP include: 1) Determining market trends—prices above VWAP suggest a bullish trend, while prices below it suggest a bearish trend. 2) Identifying support and resistance levels, as VWAP can act as a support or resistance line. 3) Assessing market control, with prices above VWAP indicating buyer control and below VWAP indicating seller control.

What are VWAP bands, and how do they differ from Bollinger Bands?

VWAP bands are standard deviation bands plotted around the VWAP line to gauge volatility and market movement. They differ from Bollinger Bands because VWAP bands use VWAP as the average line, whereas Bollinger Bands use a moving average. VWAP-based bands are considered more reliable due to the incorporation of both price and volume.

What is the concept of 'VWAP as a magnet'?

The concept of VWAP as a magnet refers to its ability to either attract or repel price action. While some traders believe price always gravitates toward VWAP, this is not always the case. Sometimes prices can be repelled, leading to sustained trends away from the VWAP level.

Can VWAP be used on longer time frames, such as daily or weekly charts?

No, VWAP is specifically designed for intraday time frames. It resets each day and is based on daily price and volume data, making it unsuitable for longer time frames like daily or weekly charts.

What are some common strategies for using VWAP in trading?

Common VWAP strategies include: 1) The pullback strategy, where traders look for price retracements toward VWAP in trending markets. 2) The reversal strategy, where traders look for price reversals at VWAP levels, particularly using the previous day's VWAP as a key level. 3) The mean reversion strategy, where traders buy or sell at the second standard deviation band and target the VWAP line.