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Warrior Trading Blog

What is VWAP? | Brisk Break Down

vwap

Hey, everyone. Ross here from Warrior Training. So in this video, I’m going to explain how to use the volume weighted average price and how it’s different from a moving average. Now as you know, a moving average is simply the average price of a stock over a fixed period of time. So it helps us understand the historical price of a stock.

A volume weighted average price is a little different. It takes the average price of a stock, but it factors in the amount of volume traded at each price to come up with an average price of the stock over the course of a day. The VWAP is not used on daily charts. This is very interesting. It’s used only on intraday charts and it is the same regardless of whether you’re looking at a one minute, a five minute, or a 15 minute, 60 minute, or any timeframe intraday because the amount of volume that took place at those prices is the same regardless. So that’s in contrast to moving averages, which change because the average price over a fixed period of candles is going to be different depending on the timeframe of each candlestick .

So let’s look at the chart here. This is the Lightspeed Trader platform. I’m going to go to chart parameters here and I’m going to go just real quick to the daily chart and what you’ll notice is that this line right here is going to disappear. So on the daily chart, I’m only going to have my moving averages. This is the nine, the 20 and the 200. One is the simple, one is the exponential. So if I flip back here to the five minute chart, what you’ll see is that the volume weighted average price is very different than these big moving averages up here.

These are the two hundreds and down here we’ve got the nine and the 20. The VWAP is sort of this in between, it’s the average price of the stock over the course of the day. It’s very popular among institutional traders. When their directions are to buy or sell stock, they often want to get in or get out as close to VWAP as possible because they’d be getting in or out at the average price. If you get in or out way down here, you’re getting out or get… whatever, far away from the average price. So up here is far away down here is far away, whereas in this area is a little closer to the median, a little closer to the average, which would be the target.

If we look at another stock, let’s look at the, look at Facebook for instance. Well this stock opened and pretty much sold off all day, so maybe that’s not the best example. We can look at Apple for a moment. You can see Apple opened sideways consolidation, broke below the VWAP, and then when it came back above the VWAP, it was strong here, breaking back above it, holding above it, it comes back down, finds support at the VWAP right here and then flushes below it. It is unable to close back above it. And so now this ends up being a kind of a bit of a resistance point and it sells off from here.

So of all the technical indicators I use, I try to keep it simple. I use my moving averages, I use my volume weighted average price, and I use the volume bars at the bottom and I don’t use anything else. I want to use the indicators that are most popular among active traders because I want to know that if I see something, I’m seeing something that other people are probably seeing as well. But beyond that, I keep my charts clean, I keep them simple, and I think that’s been a good way to do it. As usual, if you have any questions, don’t hesitate to reach out.

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