How to Trade Using the VWAP
You may have heard about the volume-weighted average price, or VWAP. But what is it? This article helps you understand how to trade using the VWAP.
Published October 30, 2021.
The volume-weighted average price is a statistic regularly utilized by investors to determine the average price of a security, based on price and volume.
The VWAP approach to trading can locate a price for entry and exit. But is this a benchmark that all investors can use for their investment endeavors?
Let's find out.
Is VWAP Better for Long or Short Term Trading?
For the most part, the VWAP trading strategy is better for day and swing traders, who usually go in and out of positions for minutes or hours at a time.
A VWAP chart, whether it is one minute or 30 minutes, can identify intraday trends for short-term trends. Once you have a terrific feel for the market, you know when is the best time to buy and the best time to sell.
How Do Traders Use VWAP?
So, what are some strategies that traders employ to get the most out of their positions, whether in a stock or a cryptocurrency?
Buying the Breakdown
While there are many strategies to incorporate into your broader trading plans, a common VWAP example would be buying the breakout.
This consists of watching the tape and inserting a buy order slightly above the high of the candle that is above the VWAP. It may seem like you're chasing gains, which could happen sometimes, but the most likely result is only shaving a couple of percentage points from your gains.
The Pullback Entry
By monitoring the price action, from time to sales, you could step in front of the sell-off. This could be challenging for novice investors, but with time, you will have a better sense of what is transpiring.
Sell at a Big Price Increase
Finally, sell when there is enormous volume. Typically, when there is a massive price increase in a short amount of time, and you have grabbed onto the gains, it is time to sell.
Day, swing, and short-term trading is not for the faint of heart or investors who have only gotten some skin in the game. It requires patience, objectiveness, and due diligence.
While long-term investors will gape at various metrics, such as the simple moving average or the Relative Strength Index (RSI), short-term traders need to continually use the volume-weighted average price to maximize their trading pursuits.