How to Use the VWAP for Day Trading

For day traders, the volume-weighted average (VWAP) is crucial as a technical indicator since it can identify price points and entry and exit positions.

Andrew Moran
By Andrew Moran
Edited by Taj Schlebusch

Published October 30, 2021.

The consensus among financial experts is that one of the best tools any day trader could employ is the VWAP indicator, the volume-weighted average price. The significance of VWAP is immense for any individual interested in a day or swing trading.

By applying the VWAP, day traders can identify intraday trends, position entries and exits, and price points. While this could be used for long-term investors who want to get involved in a stock at a good price, it is far superior for day trading since a VWAP chart can determine the direction of a security during a trading session.

What Is a Short-Term VWAP Trading Strategy?

A short-term VWAP trading strategy is simple enough.

It consists of purchasing shares of a stock at the first closing price above VWAP as an entry and then selling at a predetermined point above that price to exit your position (and hopefully earning a profit!).

Generally, most of the stock's gains will take place early in the trading session, with the rally being minimal or even dissipating throughout the day.

How to Apply the VWAP

For seasoned day traders, there are many VWAP settings for day trading. The best strategy is based on your skill level and expectations of how stocks, exchange-traded funds (ETFs), cryptocurrencies, and commodities perform during the session.

Exit at the Daily High

The most common approach for incorporating VWAP into your day trading endeavors is to exit your trade at the daily high.

Use the Breakout Entry

The other strategy is the breakout entry. While this could be risky since you might lose a couple of percentage points, it is another way for new traders to garner a feel for day trading and VWAP. Essentially, you see the price it closed above the VWAP, and then you initiate a position at the breakout.

Start a Long Entry

For beginners, another way is to start a long entry when the price finishes in a support region, with a stop-loss order that is distant from the farthest line of the region and a profit target near the VWAP line.

Isn't This Just a Simple Moving Average?

The difference may seem negligible, but the SMA is more for medium- and long-term investing since it functions as a technical indicator to learn if an asset price will maintain its trend or tergiversate into a bear or bull direction.