Volume Weighted Moving Average Price (VWAP)

You often hear people talk about using the VWAP, or Volume Weighted Moving Average Price, as a trading tool, especially for day traders.  Well VWAP is a measure of the average price a stock traded over the trading horizon (usually a day).  This essentially shows what the average traders are paying for a particular stock.  Often times, people try not to get into a position unless you can get in at the VWAP level in order to ensure you’re not paying too much.  It also acts as an indicator, allowing the investors to understand whether the stock is trending or how it is trending throughout the day.

See the below chart of XLF from 4-21-09 for example.

The orange line represents the VWAP for the day.  As you can see, the financial ETF was trending up most of the day above the VWAP line.  It dipped below the VWAP slightly but bounced back up and never looked back.  This is indicating a very bullish trending day.

On the other hand, a stock with a VWAP line like below indicates a non-trending day going above and beyond the VWAP throughout the day.

You also can observe that stock prices often reverses near the VWAP line as seen above.  I’ve seen this happen quite often in the past.  When the market or a stock is not trending bullish or bearish, you may be able to gain an edge by looking to get in or get out near the VWAP line.  VWAP has been around for quite some time, and people are certainly using it as a trading tool.  If people are looking at VWAP and making trading decisions based on that, shouldn’t you?

Where can I find a charting tool for VWAP?  And it’s FREE?  Go to http://www.bestfreecharts.com