The VWAP trading indicator monitors a stock’s average price and the volume of trades that have taken place throughout the day. The letters VWAP stand for volume-weighted average price. Day traders can take quite a few things away from this data. Anytime a high volume of trades takes place, the price has a chance to shift quickly. One of the biggest mistakes people make, though, is to think that this always means the price will go up.
There are times when the opposite is actually true. The high volume of trades shown on the VWAP trading indicator is happening because the smart money is looking to get out of their current position. As a general rule, if the price is currently above the daily average, it’s a good time to sell. When you see the price below the daily average, it could be a good time to buy. However, as with all of the indicators in day trading, there are exceptions to the rule.
Suppose you find a stock whose price is currently below the daily average. As was just mentioned, the general consensus would tell you that it’s a good time to buy. If there’s not enough trading volume at that point in the day, though, the price won’t go up. On a good day, that could leave you in a position where the stock price doesn’t really go anywhere for the rest of the day. That may allow you to sell it off with a small loss or even earn a few cents.
There’s also a chance, though, that the low volume ultimately drives the price down. That’s why just looking at the average price of a stock on the VWAP trading indicator can be a very near-sighted way to trade. Volume is just as important to the equation as the price. Another important element to keep in mind when using a VWAP is the time frame. Most professional traders will tell you to keep the time frame anywhere between 5 and 15 minutes. What that’s going to do is give you a clearer picture of the current price and volume within a stock.
Another mistake people make is trying to look at daily time frames to anticipate where the price will go. Remember that the VWAP trading indicator is an average, but a lot can happen within a day. If you’re looking at the daily time frame, you can see that the current price is below the average and the volume of trades is decent. Conventional wisdom, as was mentioned, would indicate it’s a great time to buy. The problem is, the average is higher because the price started out the day on a high and then dropped, and the volume is decent because everyone was getting out! Now, there’s no guarantee that the price will return to a previous high point, at least not within the next few hours or even days.
The VWAP can be one of the go-to tools for day traders. First, it’s very important to know how to adjust it properly. The key is to read every detail the indicator provides. Once you learn how to do that, you’ll have unlocked one of the most powerful day-trading tools!
Ready to get your trading career started the right way? Click here to sign up for our Live Trading Bootcamp & get access to our full vault of elite trading resources and coaching!
