(VWAP) Guide for trading.
VWAP DEFINATION
The volume weighted average price is a trading indicator that is calculated by taking the number of shares bought times the share price and then dividing by total shares bought.
Basically it calculates the average price of the stock based on how many shares were traded at different prices and its usually calculated within a one day time frame.
The VWAP is displayed on the chart as a moving average but is much slower moving than your 8 and 20 day moving average.
This is a key indicator and guideline for institutions and pension plans that look to take large positions and need to know whether they are getting in at a good price or not.
It also allows them to get into positions without disrupting the market or elevating prices unnaturally with their large orders, resulting in unfavorable entry prices for them.
The VWAP is a major level of importance that a lot of big traders and institutions monitor and is why you should be paying attention to it too.
VWAP Trading Strategies: So you may be asking yourself, how do I trade using the VWAP indicator?
The VWAP Pullback
In the 5-minute chart above you will notice two lines. The teal one is the 20-day moving average while the white one is the Volume Weighted Average Price, which is much slower moving. A strategy that a lot of traders use is to short when prices close below this key indicator and buy when they close above.
Another strategy that traders use is to let the market make a move for the first couple candles and then wait for a pullback to the VWAP to either get long with the trend or short with the trend, which ever way the market is moving.
This is a great area to enter a trade because you know if it closes on the other side of where you got in, then it’s time to get out and move on the next trade.
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