Volume Weighted Average Price (VWAP)
The Volume Weighted Average Price (VWAP) is a benchmark indicator that shows the average price of an asset based on both volume and price. It tells you where most trading activity occurred throughout the day—making it a key decision point for entries, exits, and risk control.
Unlike moving averages that rely only on price, VWAP gives more weight to higher-volume candles, making it more responsive to real market behavior.
How VWAP Works
VWAP is calculated using the total price traded for every transaction (price × volume) and dividing it by the total volume:
VWAP = (Σ Price × Volume) / Σ Volume
Most trading platforms display VWAP as a line that updates continuously throughout the day, starting fresh with each new session. Since it resets daily, VWAP is best used on intraday charts like 1-minute, 5-minute, or 15-minute timeframes.
Here’s how to interpret it:
| Price vs VWAP | What It Means |
|---|---|
| Price above VWAP | Bullish bias (price has strength) |
| Price below VWAP | Bearish bias (selling pressure) |
| Price near VWAP | Neutral zone or fair value |
How Traders Use It
VWAP is popular for many reasons—it’s clean, trusted, and incredibly effective for confirming trend direction and institutional activity.
Here’s how traders typically use it:
Dynamic Support/Resistance
VWAP often acts like a gravity line. When price pulls back to VWAP and holds, it can bounce from there. When it breaks below, it can act as resistance.
Trend Confirmation
If price stays above VWAP, bulls are in control. Below VWAP, sellers are dominating.
Institutional Benchmark
Many funds aim to buy or sell near VWAP so they don’t overpay or undersell. That’s why price often respects it.
Example Setup
You’re trading a stock that breaks out in the morning and starts pulling back midday. You wait to see if it will hold above VWAP.
As price taps the VWAP and bounces with volume, you enter long—confident that bulls are defending the level. You use VWAP as your dynamic stop, knowing that a break below it might signal trend weakness.
This same logic applies in reverse when shorting or managing a fading setup.
Pros and Cons of Using VWAP
Pros
Trusted by institutions and retail traders alike
Combines volume and price into a reliable reference line
Great for identifying trend strength and fair value
Excellent tool for intraday strategies
Cons
Resets daily—less useful for long-term charts
Can give false signals in low-volume environments
Not ideal as a standalone signal generator
When to Use VWAP
VWAP is your go-to tool when you’re trading intraday trends, breakouts, or pullbacks. It keeps you grounded with a fair-value reference and helps you avoid chasing price during emotional spikes. In choppy conditions, VWAP can help you stay flat or fade moves that overextend.
Whether you’re scalping, day trading, or just managing entries better, the Volume Weighted Average Price is one of the most important tools you can have on your chart. Lets keep going with the Negative Volume Index (NVI)