What it is and how to use it
What is it?
The Volume Weighted Average Price (VWAP) is a trading benchmark representing the average price a security has traded at throughout the day, based on both volume and price. VWAP provides a more accurate representation of the average price by weighing it according to the volume of trades. This makes it particularly useful for understanding the true average price over a specified period.
Who made it?
The concept of VWAP has been widely used in financial markets, particularly by institutional traders. It is not attributed to a single creator but has become a standard tool for traders looking to assess the average price level of a security.
How is it calculated?
The formula for VWAP is:
VWAP = sum(volume[i] * price[i]) / sum(volume[i])
Where:
price[i] is the typical price for each period (calculated as (high + low + close) / 3).
volume[i] is the volume for each period.
Code (ProRealTime)
How do you use it?
Volume Weighted Average Price can be used in several ways:
Benchmark for Trades:
VWAP is often used by institutional traders to ensure they execute large orders at a fair price. Trading above the VWAP can indicate a strong uptrend while trading below it can indicate a downtrend.
Intraday Indicator:
It is primarily used as an intraday indicator to provide traders with a reference point for the day's trading session. It helps you assess the current price relative to the average price, weighted by volume.
Support and Resistance:
VWAP can act as a dynamic support and resistance level. Prices often tend to gravitate towards the VWAP during the trading day.
FAQ
Q: What are the best settings for VWAP?
A: VWAP is typically used as an intraday indicator, so it resets at the beginning of each trading day. There's no need to adjust settings; just use it to compare the current price to the average price based on volume.
Q: Is VWAP good for day trading?
A: Yes, VWAP is excellent for day trading. It helps you see the average price of a security based on volume, providing a benchmark for intraday trading.
Q: How can VWAP be used to improve trading?
A: VWAP helps you identify whether a security is trading above or below its average price, providing potential entry and exit points. It's also useful for confirming trends and spotting reversals.
Strategies using VWAP
None so far.
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