Understanding VWAPs: Key Concepts and Strategic Trading
What is VWAP?
VWAP calculates the average price a security has traded at throughout the session, weighted by volume. Unlike a simple moving average, VWAP gives more weight to price levels where heavy volume occurred, making it a more accurate reflection of where the market truly values an asset. Institutional traders frequently use VWAP as a benchmark to gauge whether they received a good fill on their orders.
Value Area (VA)
VWAP acts as a dynamic support and resistance level throughout the trading session. When price is trading above VWAP, the market is considered bullish — most participants who traded that session are in profit. When price is below VWAP, the market is bearish — most participants are underwater. Price often gravitates back toward VWAP, making it a magnet for mean reversion trades.
Above VWAP
Look for long opportunities, as buyers are in control and price is trading at a premium to the session's average.
Below VWAP
Look for short opportunities, as sellers are in control and price is trading at a discount to the session's average.
VWAP Standard Deviation Bands
VWAP Standard Deviation Bands extend above and below the VWAP line, typically at 1, 2, and 3 standard deviations. These bands help identify overbought and oversold conditions relative to the session's average price.
Upper Bands
​When price reaches the upper deviation bands, it suggests the asset may be overextended to the upside. This can signal a potential pullback toward VWAP.
Lower Bands
When price reaches the lower deviation bands, it suggests the asset may be oversold. This can signal a potential bounce back toward VWAP.
Anchored VWAP
While standard VWAP resets each session, Anchored VWAP allows you to set the starting point from any significant event — an earnings report, a swing high or low, or the start of a trend. This gives you a volume-weighted average from that specific moment, revealing whether buyers or sellers from that event are still in control.
Practical Application in Trading
Entry and Exit Points
Long Positions: Look for entries when price pulls back to VWAP from above, especially if it holds as support. Buying near the lower deviation bands can also offer favorable risk-to-reward setups.
Short Positions: Consider shorting when price rejects VWAP from below, confirming it as resistance. Selling near the upper deviation bands can also signal overextension.
Risk Management
Use VWAP and its deviation bands as natural levels for setting stop-losses. For long positions, a stop below VWAP or the lower band defines clear risk. For shorts, a stop above VWAP or the upper band keeps your risk contained.
Market Context
Always consider the broader market context. In strong trending days, price may ride above or below VWAP all session without reverting. VWAP works best as a mean reversion tool on range-bound or rotational days.
Confirmation with Other Indicators
While VWAP provides strategic entry and exit points, confirm these with our custom VWAP indicator built for TradeSafeAI members. You can access it with your VWAP module subscription.
Understanding VWAP offers a clear view of where institutional money is positioned. By leveraging VWAP as dynamic support and resistance, using deviation bands to spot overextension, and anchoring VWAP to key events, traders can align their strategies with smart money flow. These insights should be used alongside a comprehensive trading plan and risk management strategy to navigate the market effectively.