How to Trade with the VWAP

VWAP – Volume Weighted Average Price – is a powerful trading tool. While the indicator has a multitude of uses, I have found it’s particularly helpful in conjunction with intraday earnings breakouts. On Monday, I used the VWAP for a trade in $ALDR.

How I Use the VWAP

  • Every morning, I scan for stocks that are breaking out on a strong press release or earnings announcement
  • For me to be interested, the stock must breakout above a key level of resistance
  • $ALDR had been forming a downtrend for awhile, then on Monday it gapped over the trend line and its 20 and 50 DMAs, which constitute three levels of significant resistance
  • I began stalking it for an intraday entry, as buying in the first big move provides poor reward to risk
  • It formed a level of resistance, and I knew a breakout over that could be powerful
  • But, the smart money doesn’t buy at the high, but instead buys a dip in anticipation of the breakout
  • I bought $ALDR when it pulled back to the VWAP – the $25.20ish level – in anticipation of breakout
  • The breakout failed, but because I had a good entry, I still made money, selling up to almost $28

There is nothing magical about the VWAP. Just because a stock touches it, doesn’t mean it’s a valid buy or sell signal. But, I have found that when a stock makes a strong morning run and then pulls back, the VWAP is often a spot where it founds strong support. Ideally, you want to see high relative volume on the run up, then lower volume on the pullback; $ALDR exhibited these traits. Take a look at the following video of my $ALDR trade, and as always, email me if you have questions!