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Trading With VWAP Indicator For Beginners (Best Ways To Trade Stocks & Forex With VWAP) - YouTube
Channel: The Secret Mindset
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The volume weighted average price (VWAP) is
a trading benchmark used by traders that gives
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the average price a stock has traded throughout
the day, based on both volume and price.
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It is important because it provides traders
with insight into both the trend and value
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of a security.
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The Formula for the Volume Weighted Average
Price (VWAP) is pretty simple.
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You add up the dollars traded for every transaction
(so, the price multiplied by the number of
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shares traded) and then divide by the total
shares traded.
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On a chart, VWAP and a moving average may
look similar.
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These two indicators are calculating different
things.
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VWAP is calculating the sum of price multiplied
by volume, divided by total volume, while
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a simple moving average is calculated by summing
up closing prices over a certain period (say
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20), and then dividing it by how many periods
there are (20).
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Volume is not factored in.
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The volume weighted average price (VWAP) appears
as a single line on intraday charts (1 minute,
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15 minute, and so on), similar to how a moving
average looks.
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Like moving averages, VWAP lags price because
it is an average based on past data.
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Despite this lag, you can compare VWAP with
the current price to determine the general
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direction of intraday prices.
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It works similar to a moving average.
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In general, intraday prices are falling when
below VWAP and intraday prices are rising
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when above VWAP.
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So A rising VWAP, with the price above the
VWAP line, means the price is likely in an
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short term uptrend.
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A declining VWAP, with the price below the
VWAP line, means the price is likely in a
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short term downtrend.
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Also, don't rely on VWAP exclusively to determine
trend, since it is only showing a historical
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average, and not what is happening currently
or in the future.
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What Does Volume Weighted Average Price (VWAP)
Tell You?
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Large institutional buyers and mutual funds
use the VWAP indicator to move into or out
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of stocks with a market impact as small as
possible.
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They use VWAP to identify liquidity points.
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The idea is not to disrupt the market when
entering large buy or sell orders.
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VWAP helps these institutions determine the
liquid and illiquid price points for a specific
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security over a very short time period.
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Therefore, when possible, institutions will
try to buy below the VWAP, or sell above it.
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This way their actions push the price back
toward the average, instead of away from it.
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VWAP can also be used to measure trading efficiency.
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After buying or selling a stock, big market
players can compare their price to VWAP values.
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A buy order executed below the VWAP value
would be considered a good fill because the
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security was bought at a below average price.
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Conversely, a sell order executed above the
VWAP would be considered a good fill because
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it was sold at an above average price.
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Retail traders, on the other hand, tend to
use VWAP more as a trend confirmation tool,
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similar to a moving average.
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When the price is above VWAP they look only
to initiate long positions.
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When the price is below VWAP they only look
to initiate short positions.
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This is why day traders love the VWAP indicator,
because more than often, the price finds support
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and resistance around the VWAP.
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Knowing that other traders and algorithms
are buying and selling around the VWAP line,
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if you combine the VWAP with simple price
action, a VWAP strategy can help you find
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dynamic support and resistance levels in the
market.
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Also, the likelihood of a VWAP line becoming
a dynamic support and resistance zone becomes
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higher when the market is trending.
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So, for uptrends for example, look for higher
highs and highs lows and pay attention at
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the price action around the VWAP.
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Here are a few reasons why so many top day
traders love VWAP:
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VWAP is a simple indicator: the price is either
above it or below it.
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When it comes to day trading, simplicity often
rules.
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It鈥檚 an easy measurement on whether a stock
is cheap or expensive on the day.
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You can use it to help you pinpoint intelligent
entry and exit points for your day trades.
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It can help you determine trend changes, often
quicker than moving averages.
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Now, how to trade with the VWAP?
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You can use it for 2 types of trades: breakouts
and pullbacks.
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VWAP breakout setup is very simple but not
what you may be thinking.
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So a bullish breakout is when a stock鈥檚
price moves above a previously strongly held
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resistance level, often with higher trading
volume.
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This can signal that traders are excited about
this move and the stock may go on an extended
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price run.
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But we are not looking for a breakout to new
highs but a break above the VWAP itself with
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strength.
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When it comes to a VWAP breakout, we look
for periods when a stock price drops below
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the VWAP.
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This can often signal that buyers are exiting
their long positions, which lowers the price
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compared to the VWAP.
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This can potentially be a good situation to
look for a long trade, with the expectation
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that the stock will soon bounce back and continue
its upward movement.
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Essentially, you wait for the stock to test
the VWAP to the downside.
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Next, you will want to look for the stock
to close above the VWAP.
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You will then look to buy above the high of
the candle that closed above the VWAP.
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Here are some examples of VWAP breakout trades.
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Next is the VWAP Pullback trade.
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A pullback is where a stock that鈥檚 on an
extended move upward or downward makes a small
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movement in the opposite direction.
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Pullbacks are a common price movement, especially
in heavy trends.
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To trade a VWAP pullback setup, you have to
find a stock that鈥檚 in a clear uptrend,
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consistently making higher highs and higher
lows.
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The stock price makes a pullback to the downside,
returning to the VWAP level on the chart.
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This is a chance to buy the stock at the daily
average price.
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After you enter your long, you鈥檙e looking
for price to continue its uptrend, gradually
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pulling the VWAP up along with it.
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Here are some examples of VWAP pullback trades.
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Here鈥檚 an important tip: If you use longer-term
charts, such as the 30-minute or 60-minute,
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your VWAP data will greatly lag behind a shorter-term
chart (like the 1-minute or 5-minute).
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On a longer-term chart, the speed at which
the VWAP generates a signal could mean that
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you completely miss the move.
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So, if you use VWAP, opt for the shorter-term
charts.
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Also, you have to be smart with where you
place your stop-loss.
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A common mistake is to place your stops few
points below the VWAP.
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You will be stopped out often of you place
your stops close to the VWAP.
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There鈥檚 a smarter way.
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For instance, if you take a VWAP pullback
trade, you should look to place your stop-loss
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on the other side of a key chart level.
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That level may be below a pivot point or previous
strong support level.
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That way, you can use the VWAP to try to keep
trading in the right direction but maintain
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a stop-loss at a logical level.
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Alternatively, if there鈥檚 no major level,
you can also look to keep your stock on the
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other side of a recent swing point.
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So if you鈥檙e long a stock that鈥檚 making
higher highs and higher lows, you can place
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your stop-loss just below the previous swing
low.
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The VWAP itself is a simple and effective
indicator.
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But that doesn鈥檛 mean you can just plug
and play, then expect killer result.
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The Volume Weighted Average Price (VWAP) has
its limitations.
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VWAP is considered a single-day indicator,
and is restarted at the open of each new trading
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day.
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Attempting to create an average VWAP over
many days could mean that the average becomes
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distorted from the true VWAP reading.
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Also, don鈥檛 forget that VWAP is based on
historical values and does not have predictive
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qualities.
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VWAP serves as a reference point for prices
for one day.
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For this reason, it is best suited for intraday
analysis.
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Keep in mind that VWAP is a cumulative indicator,
which means the number of data points progressively
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increases throughout the day.
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This is why VWAP lags price and this lag increases
as the day extends.
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Once you apply the VWAP to your day trading
setup, you will soon realize that it is like
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any other indicator.
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There are some stocks and markets where it
will pinpoint entries just right and in others
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it will appear worthless.
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That鈥檚 why, I encourage you to use the VWAP
indicator in combination with price action,
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so you can simplify your decision-making process
and make better trades.
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As always, if you learned something new, make
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Until next time
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