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How to Level Up Your Trading with VWAP

Newton’s first law states that an object at rest stays at rest and an object in motion stays in motion unless acted upon by an unbalanced force. Similarly, stocks need an unbalanced force—momentum or liquidity—to push them to move and produce the kinds of outsized returns that active traders seek.

Volume drives the momentum that pushes prices higher or lower. While there are many different volume indicators, such as on-balance volume (OBV), the volume-weighted average price (VWAP) is one of the few that combines price and volume to show you who’s in control of the market at a given point in time.

Let’s take a closer look at the VWAP and some interesting strategies that you can put into use to improve your risk-adjusted returns.

What is VWAP?

The Volume Weighted Average Price, or VWAP, is a popular indicator used by short-term and algorithmic traders. While it looks similar to a moving average, the VWAP factors volume into the equation to provide greater insight into market movements. 

 The VWAP indicator is typically drawn as a single line on intraday or daily charts.

Example of the VWAP on a $SPY Chart. Example of the VWAP on a $SPY Chart. Source: TrendSpider.

How to Calculate VWAP

You can calculate VWAP in a few easy steps:

  1. Calculate the Typical Price (TP) for each period (e.g. (High + Low + Close) / 3).
  2. Multiply the Typical Price by the Volume (e.g. TP * V).
  3. Calculate the VWAP by keeping a running total of the TP and Volume and applying the formula Cumulative TP * V / Cumulative Volume.

VWAP equation.

The calculation produces a volume-weighted average price for each data point, which can be overlaid on the price chart to form a line or indicator.

How to Use VWAP

There are many different ways to use the volume-weighted average price.

Institutional traders use the VWAP to move in and out of stocks with a minimal price impact. For example, they may buy below the VWAP or sell above the VWAP to push the price back to an average instead of away from it and maintain an orderly market.

Short-term traders use the VWAP to determine if the price is overbought or oversold, as well as to evaluate their trade fills. If a long trade is filled above the VWAP, it could indicate that the trade received a subpar fill (and vice versa for a short trade).

Swing and position traders use the VWAP in the same way as a moving average. For example, they may look for crossovers between the VWAP and stock price as a trading signal—or part of a larger trading system.

AlphaTrends Anchored VWAP

Technical analysis is dependent on the belief that the price has memory. If the price breaks through a prior resistance level, market technicians believe that the prior resistance level becomes a support level. The rationale is simple: Humans have an inherent anchoring bias that causes us to rely heavily on the most impactful piece of information.

Brian Shannon’s Alphatrends Anchored VWAP, or AVWAP, makes it easy to adjust the VWAP based on a specific point in time when the market may have experienced a significant or impactful event. For example, you may anchor the VWAP to a reaction high or to a presidential election to reflect a “new normal”.

TrendSpider makes it easy to use the AVWAP with several unique settings. Start by clicking on the next to Indicators on the top menu bar to open the dialog. Add Anchored VWAP to your indicators, and customize the settings based on your goals.

Anchored VWAP Settings in TrendSpider. Anchored VWAP Settings in TrendSpider. Source: TrendSpider.

AVWAP Strategies & Examples

The AVWAP opens the door to many new strategies since you can create multiple lines that start from different anchoring points.

The example below shows an AVWAP “pinch” (coined by Brian Shannon), which creates a range for the price prior to the price breaking out higher. The AVWAPs in this example are anchored to the reaction low and reaction high over the visible timeframe.

The AVWAP Pinch. The AVWAP Pinch. Source: TrendSpider.

You can also introduce percentage-based AVWAP band offsets to create a margin of error around the primary AVWAP line. If you’re creating an automated trading strategy, these margins of error can help you avoid narrowly missing price moves.

The example below shows AVWAP bands created with percentage bands set at 1% and 2% offset levels to create a margin of error.

AVWAP Price Bands. AVWAP Price Bands. Source: TrendSpider.

In addition to these bands, you can create:

  • Standard deviation bands with four default settings inspired by Fibonacci levels.
  • Percentage bands with four default settings inspired by Fibonacci levels.
  • Alphatrends VbP Ribbon with variable line thickness based on the amount of volume found at the price relative to the entirety of the line.

Traders that want to anchor VWAPs to reaction highs or lows can use continuous anchors to adjust the anchor points over time. For example, TrendSpider provides a “continuous” setting where each blue raindrop re-anchors the VWAP.

Continuous AVWAP. Continuous AVWAP. Source: TrendSpider.

In addition to blue raindrops, you can auto-anchor AVWAPs to:

  • High volume candle in a candle range
  • Highest high in a candle range
  • Lowest low in a candle range
  • Most recent blue doji raindrop
  • Recent gaps
  • Day to date (since today’s open)
  • Week to date (since open at start of week)
  • Month to date (since the start of the month)
  • Quarter to date (since the start of the quarter)
  • Year to date (since January 1)

TrendSpider also makes it easy to create dynamic price alerts on or backtest AVWAP lines that are automatically re-anchored without any added effort.

You can even use AVWAPs created from a specific period to create a support or resistance level for a future period. In the example below, we calculate the AVWAP between a high and low and that price becomes a key resistance level for a future move.

AVWAP Resistance Level via Volume by Price Tool. AVWAP Resistance Level via Volume by Price Tool. Source: TrendSpider.

These are just a few of the many strategies that you can use that leverage VWAP and AVWAP levels to improve your trading results.

The Bottom Line

The volume-weighted average price makes it easy to spot price and volume trends over time. While the VWAP is commonly used by day traders and as part of trading algorithms, the Alphatrends Anchored VWAP has become a popular derivative indicator for short- to medium-term traders using a wide array of different strategies.

In addition to VWAP and AVWAP, TrendSpider provides several other volume-based indicators, including our proprietary Raindrop charts, which incorporate volume into traditional candles to yield a whole new level of insight.

You can try out VWAP or AVWAP on your own by signing up for a free trial of TrendSpider today!