When a day trader begins their journey into the day trading world, they begin to hear words foreign to them as if they were part of a whole new language. With all day trading, there are terms that newbies must learn in order to perform certain tasks; just like traveling to a foreign country, it makes life easier when you know their language. Day trading is the same.
One very common term used in the day trading world is VWAP. Most new day traders freeze when they hear veteran day traders say this in everyday conversations and they begin to wonder:
What is VWAP?
What does VWAP stand for?
Where is VWAP located in my trading software?
If the expert day traders are using VWAP, do all day traders?
Top tip: It’s important to note that ZeroPro trading software comes with a huge array of indicators including VWAP that can be customized by weight/color to your liking.
VWAP Explained
As Investopedia states: VWAP stands for Volume Weighted Average Price and is calculated "by totaling the dollars traded for every transaction (price multiplied by the volume) and then dividing by the total shares traded. Cumulative = total since the trading session opened."
Many day traders who are "going long" or buying a stock use the VWAP indicator as a way to find support when a stock has an upwards trend. If the stock is above VWAP, then the average day trader is "in the money" or making money and if the stock falls below the VWAP line, then the average trader is considered "underwater" or losing money.’
Where to Find VWAP
VWAP is found on most, if not all, stock trading software. Each broker is different so make sure you either ask customer support on how to turn on VWAP or use YouTube for a visual explanation for your trading software. When the VWAP indicator is turned on you will see a line on your chart that will either cross through, above, or below the candlesticks. This is known as your VWAP indicator line. This will help guide your trading strategy.
VWAP used for Short Selling
When a short seller is looking at VWAP they are typically looking for a stock to be failing (under VWAP) and waiting for it to spike back up to touch the VWAP indicator line and fail. This price action is also known as a VWAP fail (look below for an example). Short sellers typically add to their positions or begin their positions when the stock is having a first red day after several up trending green days. When the candlestick fails near the VWAP line, they add to their position and ride the position down while locking in profits along the way. Of course this varies upon different day traders and their strategies. Below is an example of $GME falling under VWAP on July 21.
VWAP used for Longs
As a stock is moving in an upwards trend, VWAP can be used as a support to either add to the day trader's position or some use it as a means to cut their position (see image example above VWAP Explained paragraph heading). The image below is an example of where the ticker symbol $ADXN held above VWAP nearly all day which gives longs peace-at-mind for holding their positions. Once the stock gets too over-extended or the candlesticks move too far above the VWAP indicator, day traders begin to lock in profits.
(ZeroPro, July 21, 2022)
VWAP for Day Traders
The VWAP day trading indicator is one of the most common indicators used by many day traders. Because so many day traders incorporate VWAP into their trading strategy, it almost becomes a self-fulfilling prophecy. Many of these strategies mentioned above are taught by a lot of the top expert day traders. For this reason, trading using VWAP has become very common within the day trading community.
VWAP Tool
VWAP is a very important tool to know about to develop or at least understand when it comes to creating a trading strategy. Since many day traders use this indicator, it is best that all new day traders are familiar with how it is used and how it can become one of the great tools in the day traders arsenal. Every day trader can use this tool to their advantage!
References
TradeZero | Home (July 20, 2022) https://us.tradezero.co/
Investopedia | Blog (July 20, 2022) https://www.investopedia.com/terms/v/vwap.asp
TradePro Academy | Blog (July 20, 2022) https://tradeproacademy.com/vwap/
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This content (“Content”) is produced by Tessa Lamping. The Content represents only the views and opinions of Ms. Lamping. Ms. Lamping’s trading experiences and accomplishments are unique, and your trading results may vary substantially. TradeZero does not endorse the Content and makes no representations or warranties with respect to the accuracy of the Content or information available through any linked third party sites. The Content has been made available for informational and educational purposes only and should not be considered trading or investment advice or a recommendation as to any security. Trading securities can involve high risk and potential loss of funds. Ms. Lamping is compensated by TradeZero for producing the Content and may also receive compensation for customers she introduces to TradeZero.
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