Volume Weighted Average Price (VWAP) is a technical analysis tool that is used to measure the average price of a security or investment based on its volume. It is calculated by adding up the price of each trade over a given period of time, and then dividing that total by the total number of shares traded during that period. This gives the VWAP, which is a more accurate representation of the average price of the security than the simple average price, because it takes into account the volume of each trade.
VWAP is commonly used by traders to identify the overall trend of a security or investment, as well as to make trading decisions. For example, if the VWAP is trending upwards, it may indicate that the security is being bought more than sold, and traders can use this information to make a decision to buy the security. Conversely, if the VWAP is trending downwards, it may indicate that the security is being sold more than bought, and traders can use this information to make a decision to sell the security.
How to trade using Volume Weighted Average Price (VWAP), you can follow these steps:
Identify the underlying security or investment that you want to trade, and determine the time frame for the trade.
Add the VWAP indicator to your charting software, and adjust the parameters to suit your trading strategy. Typically, the default settings of the VWAP indicator are used, but you can adjust the time frame and other settings as needed.
Use the VWAP to identify potential entry and exit points for your trade. For example, you can buy when the price crosses above the VWAP and sell when it crosses below the VWAP. Check the intraday VWAP trend following strategy
Place your trade using a stop-loss order to limit your potential losses, and set a target profit level to take advantage of potential price movements.
Monitor the trade and adjust your stop-loss and target levels as needed.
It's important to note that VWAP is not a standalone trading system, and it should be used in conjunction with other technical and fundamental analysis tools. You should also always use risk management techniques, such as stop-loss orders, to limit your potential losses.