INDICATOR INSIGHTS

The VWAP

As introduced in Chapter 3 of our publication When to Buy and When to Sell: Combining Easy Indicators, Charts, and Financial Astrology (available on Amazon), there are several “leading indicators” that go largely unnoticed and under-utilized by the average beginner or intermediate investor. We routinely cover those that measure human emotion and market sentiment, as well as technical charts that often determine shorter term price action.  

      We also often stress the importance volume, and effect on short-term price action. As noted, there are a few different ways to assess and interpret volume, including straight volume (simply the number of shares traded in a specified period). Others include On Balance Volume, which employs a recency bias in a heavier weighting toward the end of a specified period, and Volume Profile, which identifies the heaviest volume at a specific price during a specified time frame.  

      Today we will further discuss the Volume Weighted Average Price, also known as the VWAP, which can be found on most trading platforms. The VWAP (illustrated in the form of a Moving Average) is a higher level of On Balance Volume, as it takes into consideration the volume strength throughout the entire specified time frame. While all volume indicators are “lagging indicators,” it is the closest to a leading indicator. Volume in any form calculates the sum of all shares traded regarding a stock or equity by retail investors, fund managers, etc. The VWAP, however, provides an “inside” look at institutional buying, as they possess the largest share counts and, therefore, control the largest surges in share prices.  

      When assessing a technical stock chart, average volume, candle size, and trend development are often a basis of investment and trade decisions. Add in moving averages (MAs), trend lines, and range bands, an accurate picture can be painted to assist with any stock trade opportunity. The VWAP takes this analysis to another level, as it reflects whether the stock is trading above or below the institutional demand price. Used in tandem with Support and Resistance lines, and shorter-term moving averages, the VWAP (illustrated as an MA), is a very powerful tool for day, and short-term, traders to time the market. “Holding” an equity long position is generally safe when its moving average lines remain above the VWAP, when the VWAP also continues to upslope, and vice-versa for short positions. There are also usually multiple entry points along the way under the same conditions.  

      The most popular types of VWAPs include the Yearly, Quarterly, and Anchored VWAP, all of which are useful for different time frames and strategies, though they are generally used by shorter-term, more experienced traders…  

      The 1-YR VWAP is generally utilized by long-term traders to assist in confirming their long position is above the 200, 100, and 50-day MAs, line in a clear uptrend, or below those MAs and in a clear down trend for a short position. These specific MAs allow for some leeway in price action for an equity that is planned to be held for an indefinite length of time.  

      The Quarterly VWAP can either be set at the 1st of the month at the beginning of every quarter, or even better, on the day of monthly options expiration (3rd Friday of each month), which are usually volatile days. The QVWAP shortens the chart, and is most suitable for swing-traders, who generally hold positions for a few days to a few months. As there are cycles and multiple swing highs and lows over the course of a year, it details the current 3-month period so more opportunities are available.  

      The Anchored VWAP is generally used to select a specific unique time, or event, to identify institutional activity. Active traders will generally place the VWAP at locations on the chart that reflect earnings dates, swing highs and lows, elections, major news events, etc., to gain an extra shorter-term advantage, using the same guidelines as the longer time-framed VWAPs. 

      *Please note that the three examples above are generally used on a Daily chart, not an Intra-Day chart. 

      That brings us to the VWAP itself, that is commonly utilized by day-traders on an Intra-Day basis. The VWAP resets automatically at the open of each trading day when used on any chart less than 1-day (ex: 1-hour, 15-minute, 5-minute, etc.). This reflects the current day’s “pulse” of an index, or equity, by institutions and algorithms, and is very useful in identifying the quick ebbs and flows of the day. Combined with the right indicators, the VWAP is a powerful tool in identifying strong price breakouts, reversals, and trends, to help maximize your probability of success. 

***As always, this information is not intended to be financial advice, or any specific buy or sell recommendation, but rather a guide to assist the reader in some further understanding of current economic conditions.