VWAP — Volume Weighted Average Price

Overview

VWAP (Volume Weighted Average Price) is the average price at which a security has traded throughout the day, weighted by volume. Unlike a simple moving average that treats every price equally, VWAP gives more weight to prices where larger volume was transacted — making it a true “fair value” reference point.

VWAP is heavily used by institutional traders to determine whether they got a “good fill”. For retail traders, it’s an excellent intraday support/resistance reference and a baseline for entries.

Formula

VWAP = sum(Typical Price × Volume) / sum(Volume)

Typical Price = (High + Low + Close) / 3
Reset at the start of each trading session (intraday)

Default Settings

• Calculation start: session open (intraday)
• Reset: daily, weekly, monthly variants exist
• VWAP Bands: standard deviation bands above/below (1, 2, 3 sigma) for advanced setups

How to Use It

1. Bias Filter

• Price above VWAP → intraday bullish bias, buyers in control
• Price below VWAP → intraday bearish bias, sellers in control

Institutional algos often use VWAP this way: buy below, sell above.

2. Mean Reversion to VWAP

In ranging or balanced markets, price often returns to VWAP after deviation. Fade extreme moves expecting return to fair value.

3. VWAP as Dynamic Support / Resistance

During the session, VWAP acts as a moving support level in uptrends and resistance in downtrends. Bounces off VWAP are common scalping setups.

4. VWAP Bands

Standard-deviation bands around VWAP provide statistical fade zones:

• Touch +2 sigma → statistically extended; potential short
• Touch −2 sigma → statistically extended; potential long

Strengths

• The institutional benchmark — what large traders actually use
• Resets daily — always reflects current session’s flow
• Volume-weighted — more meaningful than price-only averages
• Excellent for day traders on equity / futures markets

Weaknesses & Common Mistakes

• Limited utility on forex — no centralized volume; tick-volume approximation reduces accuracy
• Less useful on higher timeframes — VWAP is fundamentally an intraday tool
• Late-day flattening — later in session, VWAP becomes less reactive as cumulative volume grows
• Using VWAP alone — works best in combination with structure / momentum tools

Best Combinations

• VWAP + Volume Profile — powerful structural framework for intraday day trading
• VWAP + RSI — VWAP bias + RSI extremes provides quality fade entries
• VWAP + Pivot Points — multiple intraday support / resistance references

Practical Example

S&P 500 E-mini futures, 5-minute chart. Price gaps down at open below previous day’s VWAP. After consolidation, price climbs back above today’s VWAP with strong volume — bias flips bullish. Long entry on pullback to VWAP, stop below recent low, target 1.5×ATR. Reliable institutional-style intraday trade.

Bottom Line

VWAP is what the smart money watches. If you trade intraday on equities or futures, you should be watching it too.