How to Use VWAP
To use the volume-weighted average price, treat it as a reference for where the average participant is positioned this session. Above it, buyers are in profit on average; below it, sellers are. It resets each session, which is why it says nothing about anything older than that.
Video: Michael Whitman on YouTube, VWAP settings for day trading. Watch it on YouTube.
The volume-weighted average price is what the average unit traded for so far this session. That is a plain fact about the session rather than a prediction, and its usefulness comes from other people using it too.
Before you start
A session anchor you understand, because the line resets and the reset point matters. Daily, weekly, or anchored to an event — each answers a different question and they are not interchangeable.
A decision about whether you are using it as a filter or as a target. As a filter it decides which direction you are allowed to trade. As a target it marks where price may return to. Pick one.
The instrument’s ordinary bar range, so distance from the line can be judged. Take it from the intraday bars you trade on, not from the daily chart, since distance from the line is measured in those bars.
The steps
1. Confirm the anchor before reading anything
A daily line knows nothing about yesterday. If the question you are asking spans several days, the daily version is answering a different one.
2. Read which side price is on
Above the line, participants who bought this session are on average in profit. Below it, they are not. That is the whole informational content of the position.
3. Use it as a directional filter
Long only above, short only below. It removes half the setups and most of the ones taken against the session’s own weight.
4. Measure distance, not just side
Price 3 bar-ranges above the line is a different situation from price sitting on it. Distance is where the mean-reversion question lives, and it needs the bar range to be meaningful.
5. Watch the first test after a break
Price crossing and then returning to the line is the event worth watching. Holding on the first test says something; failing it says something else.
6. Anchor it to an event when the session version cannot help
Anchor to a high, a low, or a news event and it becomes the average price since that moment — which is the version that works on a swing horizon.
7. Take the stop from structure, not from the line
The line recalculates continuously, so a stop on it drifts. Where the idea is wrong is fixed, and that distance sets the size.
How to tell it worked
You can state which anchor you are using without checking. If you cannot, the line’s context is unknown and its readings are unmoored.
Trades taken against the session’s side are 0 for the period. That is the filter doing what it was added to do.
Distance was expressed in bar ranges rather than in points. 2 bar ranges away means something across instruments; 4 points does not.
And the stop came from a level, so it did not move when the line did.
What it cannot do
It cannot see across the reset. Yesterday’s volume and prices vanish from the calculation at the session anchor, so the line knows nothing about where the heavy trading of the previous day took place. A strategy trading every cross of a line that resets daily pays a round trip each time for an average that is only a few hours old.
In a thin session the weighting is doing almost no work. The line becomes an ordinary average of a handful of bars, which is a much weaker reference than the name implies.
Choosing the anchor
Session anchoring answers “where is the average participant today”. It is the right question for an intraday trade and the wrong one for anything held overnight.
Anchoring to a significant high or low answers “what has everyone paid since that event”. That is the version that matters when a level is being retested weeks later.
Anchoring to an earnings release or a policy decision isolates the period since new information arrived, which is a genuinely different reference from either of the others.
Use one at a time. Three anchored lines on a chart guarantees one of them is near price, which is the same failure as taking all three signals from an oscillator.
The original data
Of the 24,971 unique videos in the search study behind this site, 199 have an instruction-shaped title about this average, at a median of 8,685 views across 139 channels. Volume profile appears in 117 instruction-shaped titles at 18,064 and order flow in 110 titles at 22,195.
199 videos at a 8,685 median. It sits in the middle of the indicator set for coverage and near the top for how many of those videos are about intraday execution specifically, which is the context it actually belongs to.
The answer to the question on that chart is that distance from an average is not a reason on its own. A strong session spends the whole day above the line and the gap widens rather than closing. The line tells you where the average participant is, not that price owes them a return — and in the S&P 500 since 1950, 53.1% of sessions closed up, so a strong session is ordinary rather than a stretch waiting to snap back.
When it fails
The failure is a strong directional session traded as mean reversion, and the line makes it look reasonable every time. Price runs above the average, the distance grows, each new extension looks like a better entry for a fade — and the average itself is dragged upward by the same volume that is driving price. The reference keeps moving toward the price rather than the price returning to it, and every short is taken against the session’s entire weight of trading.
The second failure is forgetting the reset. A daily line knows nothing about yesterday.
A third is trading it in a thin session. The weighting is doing no work.
A fourth is placing a stop on the line. It moves every bar.
A fifth is measuring distance in points. Bar ranges travel between instruments and points do not.
And a sixth is using the session version for a swing trade. That is what anchoring is for.
Related
VWAP explains the weighting and why the reset matters so much. VWAP strategies covers the common ways it is traded. And anchored VWAP is the version for questions longer than one session.
When VWAP and a money-flow reading disagree about the same session, VWAP vs Chaikin money flow explains which question each one answers.
I keep it on an intraday chart when almost nothing else survives, because it is one of very few lines other people are also looking at. Most indicators describe price to me alone; this one describes a level that large orders are measured against, which makes reactions around it mean something.
— Michael Whitman
This page is educational, not financial advice. Test every idea on your own charts before risking money.