VWAP stands for Volume Weighted Average Price. It represents the average price a security has traded at throughout the day, weighted by volume. Unlike a simple moving average that treats every price equally, VWAP gives more weight to prices where more volume was traded.
Institutions use VWAP to execute large orders with minimal market impact. For retail traders, it serves as a dynamic support and resistance level reflecting true market value for the session.
How VWAP Is Calculated
VWAP = cumulative (price × volume) / cumulative volume
VWAP = Σ(P × V) / Σ(V)
- P = price of each trade
- V = volume of each trade
Unlike moving averages, VWAP accumulates from the market open and resets daily.
The orange line in the chart represents VWAP. Above VWAP = bullish phase; below VWAP = bearish phase.
Why Institutions Use VWAP
Large orders can't execute at a single price without moving the market. Algorithms break orders into pieces and aim for an average price near VWAP.
- Buy order below VWAP → good fill
- Sell order above VWAP → good fill
Trading with VWAP
| Use | How |
|---|---|
| Bias filter | Above VWAP = longs only. Below VWAP = shorts only |
| Dynamic support | In uptrends, VWAP acts as rising support |
| Dynamic resistance | In downtrends, VWAP acts as falling resistance |
| Reversal trigger | Close above VWAP after being below → bullish reversal |
| Reversal trigger | Close below VWAP after being above → bearish reversal |
VWAP works best on liquid instruments. Combined with Volume Profile levels (POC, VAH, VAL), it creates a powerful framework for market analysis.