Trade Using VWAP   by geofft

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What Is VWAP?

VWAP, which stands for Volume Weighted Average Price, is a technical indicator used by traders to determine when to enter and exit trades.

VWAP works in all time frames, but is particularly well suited to day trading.

Becausethe VWAP formula uses volume, it cannot be effectively used in trading the forex market, because forex does not use a central exchange therefore trades are not reported and volume information is not available. 

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The VWAP Formula 

The formula for VWAP is quite simple:

VWAP = (PRICE x VOLUME) / TOTAL VOLUME

The aim of the indicator is to show the price where most trading has occurred. The idea is that price is pulled back to it's VWAP, as traders look to exit their losing trades as close as possible to where they entered.

Calculating VWAP

The perfect VWAP would be recalculated with every single trade that takes place. However, this is often impractical, and so we calculate VWAP at regular intervals - such as every one minute.

Ways To Trade Using VWAP 

There are any number of trading strategies that can be employed using VWAP as the main indicator.

One of the most popular is to trade using VWAP bands, in which a high and low band are placed each side of the VWAP.

There are as many different ways of calculating these bands as there are traders. In the chart shown here, the bands are simply two standard deviations from the price.

In this example, if the price reaches the upper or lower band, it is thought to be over-extended from its VWAP, and a reversal is likely. Thus a suitable trade entry would be the bounce off the VWAP, with the exit being at or close to the VWAP itself.

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geofft

geofft Full-time day trader, and trading writer.
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