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Volume Weighted Average Price VWAP is one of the most popular and important day trading indicators.

VWAP is widely used by institutional traders to guide their positioning decisions. In recent years, more and more retail traders are utilizing the indicator to make trading decisions.

In this post, let’s look at what is VWAP trading. How can we apply VWAP into our trading?

What is VWAP

As I stated at the beginning of the post, VWAP stands for Volume Weighted Average Price. It is different from VWMA, I have written a blog post on VWAP vs VWMA to show the difference. Feel free to check it out.

The calculation of VWAP resets every session. It takes the current session’s price and volume information into consideration.

VWAP outputs the average price of the security so far during the session. It is a cumulative indicator that does not drop data as a moving average does.

Just to refresh your knowledge:

Moving average is an average of data over a fixed period. As time progresses, old data points are dropped out while the latest data is included in the calculation.

A simple moving average formula looks like this:

SMA = (P1 + P2 +….Pn) / n

Where:

P= Datapoint, e.g security price

n= number of time periods

In the following section, I will show you the calculation of VWAP, you will see the indicator does not drop out data over time.

How to calculate VWAP?

There are 2 main components of VWAP: Typical Price and Volume.

A typical price is the average of the High, Low, and Close.

Typical Price = (H+L+C)/3

Here is the formula of VWAP

Explanation:

The easiest way to explain the VWAP calculation is by using a spreadsheet. (I have shared the spreadsheet here).

To calculate VWAP, we take the sum of (Typical price x Volume) and divide it with the total volume of the current session.

Below is the 5-min data for 06 August 2020 extracted from TradingView.com. Most Forex brokers offer tick volume now.

The purpose is to show you the calculation of the VWAP.

Step 1: Calculate the Typical Price.

The first step is to calculate the average of High, Low, and Close prices for the given period. The average is called the typical price.

At 17:00 the High is 0.72381, Low is 0.72346, and Close is 0.72368. The volume for the period is 47.

The typical price for the period is

Typical Price = (0.72381 + 0.72346 + 0.72368)/3 = 0.72365

For 17:05, the typical price is (0.72377+ 0.72344 + 0.7237)/3 = 0.72364

Step 2: Multiply the typical price with volume.

For 17:00 Typical Price x Volume = 0.72365 x 47 = 34.01155

For 17:05 Typical Price x Volume = 0.72364 x 36 = 26.05092

We need the cumulative sum of (Typical Price x Volume).

For 17:05 the cumulative of (Typical Price x Volume) =

[Typical Price (17:00) x Volume (17:00)] + [Typical Price (17:05) x Volume (17:05)]

34.01155 + 26.05092 = 60.06247

Step 3: Calculate the cumulative Volume

At 17:05 the cumulative volume will be volume (17:05) + volume (17:00)

=36+47 = 83

Step 4: Calculate the VWAP

Finally, to calculate VWAP,

VWAP = Cumulative (Typical Price x Volume) / Cumulative Vol

At 17:05, VWAP = 60.06248/83 = 0.72364

That’s it. We have the VWAP calculated.

VWAP is a cumulative indicator, as the day progresses, it continues to take in new price and volume information into consideration without dropping out old data points.

The calculation of VWAP stops at the end of the session or trading day.

How do institutional traders use VWAP?

Institutional traders use VWAP as a benchmark for their trade executions.

Institutional traders buy or sell a large number of contracts or shares. They want to reduce the impact as much as possible. They do not want to attract attention, causing a spike in volume, and affect the price.

To avoid that, they develop automated trading strategies that trade small chunks of shares or contracts. They make sure their closing prices are as close as possible to the VWAP.

To bring the market price back to the average, they buy below VWAP and sell above it.

What is VWAP trading? The applications of VWAP

In this section, I want to focus on how retail traders use VWAP in their trading.

There are 2 main applications of VWAP adopted by traders: Trend confirmation and Mean Reversion trading.

Use VWAP in Trend trading for trend confirmation

As VWAP is calculated by using the cumulative sum of price and volume during the session, it could be used as a trend confirmation tool.

The slope of VWAP is often used to determine the trend of the day.

A rising VWAP could indicate a bullish trend while a decreasing VWAP indicates a bearish market trend.

Mean Reversion Trading Strategy

Mean Reversion is one of the most popular day trading strategies. VWAP is a great tool to implement this strategy.

How does Mean Reversion work?

Mean Reversion strategy works on the assumption that there is a mean or fair price level. The market tends to fluctuate around this mean.

So when the market deviates far from the mean, it will tend to reverse and revert to the mean price level.

There are many ways to determine if the market is overvalued. Some traders use indicators like RSI or Bollinger bands. Each has its merit.

With VWAP, I like to use the standard deviations of VWAP to guide me. This is not a holy grail, but a guide to show me how far the market has moved away from its mean.

Free VWAP Indicator for TradingView

If you are using TradingView, I have shared a free script that will plot the VWAP line, standard deviation bands, and extensions. Feel free to add it to your account.

If you haven’t heard of TradingView, it is my favorite charting platform for Forex trading now. It is stable, and customizable. TradingView offers free and paid plans. Check it out here.

The Mean Reversion strategy works well in the choppy market. And it best suits short term traders.

What is VWAP trading – Final Thoughts

VWAP is an excellent day trading tool, it is a good barometer that shows the value of the current trading session.

Just like all trading indicators, it is not a holy grail.

Before you jump in and start trading with VWAP, make sure you have done the due diligence. Testing, verifying, and understanding how the indicator could help your trading.

How do you use VWAP in your trading?

Do you have any questions?

Feel free to leave me a comment below. I am happy to help.

VWAP is one of the popular indicators used by traders. It is an intraday indicator, which best serves short term, particularly day traders.

Because of the volume component and the similarity of its name, traders often confused VWAP and another volume-associate indicator VWMA.

This is your simple guide of VWAP vs VWMA.

Are VWAP and VWMA the same? The answer is NO. Fundamentally, they are different. They serve different purposes.

If you are looking for an explanation of VWAP and VWMA, you are in the right place.

In this post, I will show you the difference between VWAP and VWMA.

We will look at the construction of these two indicators. The best way to determine if an indicator is useful to your trading is to understand the math behind it.

Without further ado, let’s look into the details now.

VWAP vs VWMA – The fundamentals

What is VWAP?

VWAP stands for Volume Weight Average Price. It is a day trading indicator. The indicator’s calculation resets at the beginning of each trading session.

VWAP is widely used by both institutions traders and retail traders. Institutional traders use it to guide their positioning decisions while retail traders mostly use it to decide if the market is under or overvalued.

To understand how to effectively use VWAP, let’s look at the construction of the indicator.

How to calculate VWAP

VWAP is the cumulative average price with respect to the volume.

Take note that VWAP uses the typical price. Typical Price can be calculated by averaging High, Low, and Close prices.

Typical Price = (H+L+C)/3

Let’s look at the formula of VWAP.

VWAP = Cumulative(Typical Price x Volume)/Cumulative (Volume)

Or

A quick explanation of VWAP calculation:

1. Calculate the typical price of a specific time period by (High + Low + Close)/3
2. Multiply the volume of the period to the typical price. (Volume x Typical Price)
3. Calculate the cumulative total of (Volume x Typical Price) since the session’s open.
4. Calculate the cumulative total of volume since the session’s open.
5. Find the ratio of Cumulative Total of (Volume x Typical Price) and Cumulative Total of Volume. This is the VWAP.

VWAP applications

Institutional traders use VWAP as a benchmark for their trade executions. Institutional automated trading strategies often execute their orders around VWAP to avoid a huge spike in volume.

For day traders, VWAP serves as a reference point. It is similar to the Volume Point of Control of Volume Profile. Traders use it as a reference to decide if the current market price is over or undervalue.

What is VWMA

VWMA stands for Volume Weight Moving Average. The name often confused traders.

VWMA is one type of moving averages. In addition to closing prices, VWMA incorporates volume into the calculation.

If you are familiar with the moving average, it is easy to get a hang of the concept of VWMA.

How to calculate VWMA

To understand the calculation of VWMA, let’s start with Simple Moving Average.

A Simple Moving Average is the average of closing prices over the past N periods.

For example, 3-Day Simple Moving Average

3-Day SMA = (Close1+Close2+Close3+Close4+Close5)/5

Now, let’s look at the VWMA. Volume Weight Moving Average is calculated as below:

C=Close

V=Volume

3-Day VWMA= (C1xV1+C2xV2+C3xV3)/(V1+V2+V3)

As you can see from the formula, each closing price is weighted with its volume. In other words, the closing price with higher volume carries more weight in the calculation.

The chart above illustrates the difference between VWMA and SMA.

SMA rises when the market rises, as it is an average of closing prices over the past 20 periods.

For the same look-back period, the VWMA moves below SMA when the market is trading higher but with lower volume.

VWMA applications

If you have already used a moving average in your trading, VWMA might give you additional insight.

There are traders using VWMA & SMA crossover to determine trend strength. This approach adds a new dimension to trend analysis with volume weighting.

Trading with VWAP

As a day trader, VWAP is one of the essential tools in my trading. I mainly used it in futures trading.

There are many ways to trade with VWAP. One of them is to work along with Volume Profile and order flow analysis.

With the understanding of the Auction Market Theory, you can build an effective day trading strategy.

Recently, I have been trying it in the Forex market. Although tick volume is less than desirable, it does offer a good general read of the market.

Conclusion – VWAP vs VWMA

I hope you have a good understanding of the constructions of VWAP and VWMA now.

The key differences between VWAP and VWMA are:

VWAP is cumulative of average price with respect to volume. It does not drop off any data over time. The calculation begins at the start of the trading session.

VWMA is a type of moving averages. The indicator calculates the average of closing prices with respect to the volume. It has a fixed period where older data will be dropped off from the calculation. The calculation is continuous across sessions.

They are different indicators and should not be confused.

You do not need more indicators to achieve success. As a rule of thumb, if it confuses you, chuck it in the bin.

Trading Tools

The charts posted on this post are created using TradingView. It is my recommended charting platform for Forex trading purposes. It offers a wide range of market data, the flexibility of strategies and indicators building using PineScripting, and live trading integration.

If you are interested in knowing more about the tools I use in my trading, such as trading journal, charting platform, or trading course check out my Resource page.

Do you have any experience trading with VWAP or VWMA?

Do you have any questions? Feel free to drop me a line in the comment section. I am happy to help.

Support and Resistance levels are one of the oldest and yet, the most effective methods, to analyze and trade the markets. It is so simple that it is often overlooked by new traders.

It is overlooked because new traders often get attracted by the fancy strategies or indicators.

In this article, let’s have a look at how to draw support resistance levels effectively.

I didn’t invent the strategy, I learned it. I have been trading for over 14 years. And I can’t remember how many books and courses I have read and studied. Everything you read on this blog is the result of years of trading and learning.

The methods might not be original, but they are effective.

Without further ado, let’s move on to look at what support resistance levels are, and how to draw them effectively.

What is the support resistance level?

The textbook definition:

From Technical Analysis of The Financial Markets by John J. Murphy

Support is a level or area on the chart under the market where buying interest is sufficiently strong to overcome selling pressure.

Technical Analysis of The Financial Markets by John J. Murphy

Visually, think about the price levels that the market repeatedly tests or the level with multiple swing lows. That’s where the market finds support.

Resistance is the opposite of support. It is a level or area over the market. Selling pressure overcomes buying pressure here. A price advance is turned back.

Technical Analysis of The Financial Markets by John J. Murphy

(But hold on, it does not mean you should trade at this level just yet, keep reading)

These are the text-book definition of support and resistance. But that is not what I would use to trade.

But they said Support and Resistance is a zone

Yes, that’s not wrong.

I prefer to start looking for a level and expand around it to construct a small zone.

In this post, I will focus on looking for a high probability level.

When I draw support resistance levels, there are few guidelines I follow. There are no hard rules. The more you practice, the more you will learn.

In general, I found these guidelines are pretty effective.

When drawing a support resistance level, start from a higher time frame, and working down to the lower time frame.

Don’t waste too much time on the “muddy” area. Always look for the obvious. Focus on the clean levels.

Guidelines to draw support and resistance levels

• #1 The more touches a level has had, the more significant the level is.
• #2 The longer a level is held, the more significant it is when it is broken.
• #3 The more times a level is tested, the weaker it becomes. It is more likely to be broken.
• #4 The inverse support or resistance levels are the ideal trade locations
• #5 Look for an inverse level that was tested multiple times before it was broken.
• #6 Focus on recent price actions and work your way to the left

#1 The more touches a level has had, the more significant the level is.

A price level that the market respects and reacts serves as a good support resistance level. Use this as one of the factors when drawing a level.

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#2 The longer a level is held, the more significant it is when it is broken.

Similar to point 1, when a support or resistance level holds up the market for a long time, it is significant. The market respects it.

When it is broken, it signals the major change of sentiment, and it serves as an excellent trade location.

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#3 The more times a level is tested, the weaker it becomes. It is more likely to be broken.

Surprised?!?

The old wisdom taught us, the frequently tested level shows strength. The truth might be just the opposite.

Let’s put it this way:

A support level holds up a price because there are buying orders waiting. The orders could be from any sources. Be it bank, retail, or institutions.

However, when the same level has been tested multiple times, the orders are filled and eventually will dry out.

What will happen when there is no more buy order to hold up the price? Where do you think the market will go now? It tanks.

The same principle applies to resistance levels.

The more time a resistance level is tested, the selling pressure (the sell orders) at the price level is consumed and reduced.

When the sell orders are drying out, breakout happens. The market continues moving up until selling orders appear.

As a guide, I keep a rule of two-touches:

I only trade at the first and second touches of a support or resistance level. After the first two touches, I will wait for the break of that level to decide the next action.

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#4 The inverse support or resistance levels are the ideal trade locations

What do I mean by “Inverse Level”?

Inverse support is a broken support level. It becomes a resistance when the market revisits the level.

Inverse resistance is a broken resistance level. It becomes support when the market revisits the level.

When a level is broken, it signals a change of sentiment. It shifts the willingness of buying or selling.

Let’s take a support level as an example. When a support level is broken, it signals the selling pressure overtakes buying pressure. In other words, there is a new willingness to sell.

When the market revisits the same level, it is likely to find resistance at the level.

How to decide which inverse level to trade? This brings us to the next point.

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#5 Look for an inverse level that was tested multiple times before it was broken.

The more times a support level is tested, the stronger the inverse level will be.

When a support level is tested multiple times, buy orders are filled. It takes a lot to break a strong support level. Eventually, selling pressure overtakes the buying, the support level is broken.

There are now more selling interests below this level. It now serves as a strong resistance level.

The same rule applies to a resistance level.

To define a good inverse level, I apply a rule of two-touches:

When looking for a support level, I prefer a broken resistance level with at least 2 touches before the breakup.

When looking for resistance level, I prefer a broken support level with at least 2 touches before the breakdown.

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#6 Focus on recent price action and work your way to the left

Some traders like to go as far as they can to draw levels based on historical swing points. Well, they might be right, but that’s not what I would do.

I am a short term trader. I focus on the most recent price structure because that is what the market is “thinking” right now.

I put more weight on the recent swing points when drawing support and resistance levels. It could be days or weeks. I won’t go back years of data to draw levels from there.

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How to draw Support Resistance levels – Final words

Support and Resistance levels are one of the many ways you can use to look at the market. It has been used by professionals, but there are also many of them that do not use it. It is not a holy grail.

Trade Location + Entry + Execution + Management

Secondly, support and resistance levels are used as trade locations. That’s just one piece of the trading puzzles. The next step is to work on your entry method, execution, and finally management.

If you are looking for an example on how to use support resistance levels, I wrote a short blog post about using Support Resistance levels to manage your exist strategy.

Thoughts

Let me “destroy” your dream before we finish up this post. If you are constantly looking for some rules you can follow and start making money, you will be disappointed.

There are no exact rules you can follow in trading.

It is always through discovery and testing. Failures after failures. And maybe, more failures. You need to find a methodology that fits you.

Having said that, study and improve your skills in identifying support and resistance levels give you a good head start.

Alright, this post is longer than I expected. Hopefully, I offer something useful.

Tools For Traders

All charts posted on this article are prepared using TradingView. TradingView is my recommended Forex charting platform. It is web-based, stable, and offer a great range of market data. It offers both free and paid plans.

If you are interested in learning more about the tools I used in my daily trading business, check out the resource page here.

Do you have any questions or comments? Feel free to drop me a line in the comment section. I am happy to help.