Description

The Volume Weighted Average Price (VWAP) is a technical analysis indicator used on intraday charts that resets at the beginning of each new trading session. It is a trading benchmark that represents the average price at which a stock has been traded during the day, based on both volume and price.

The VWAP is important because it provides traders with pricing information both on the trend and the value of a stock.

It is used in several ways by traders. in fact you can use the VWAP as a trend confirmation tool and build trading rules around it. For example, shares below VWAP can be considered as undervalued and shares above VWAP may be overvalued.

If prices below it move above, traders can go along with the stock. If prices above the VWAP move below it, they can sell their positions or start short positions. Institutional buyers, including mutual funds, use VWAP to help enter or exit stocks with as little impact on the market as possible. Therefore, when they can, the institutions will try to buy below the VWAP or sell above it. In this way their actions push the price towards the average, rather than far from it.

VWAP’s incorporation of volume is valuable to traders for what it can indicate about the degree of trading activity during short periods of time, regardless of whether the competition is opening or closing positions