This is a video lesson on VWAP, volume weighted average price and more specifically
what is VWAP and how is it used in day trading. I use VWAP a lot when day trading and swing trading
because it helps me determine the average price of a stock throughout a trading day even better than
any other indicator. For example, simple moving averages and exponential moving averages are great
very useful tools however they are calculated without actually taking into account the volume of
shares which were traded at any given price point, which can lead to them showing possible fake out
buy or sell signals. VWAP on the other hand does take into account exactly how many shares were
traded at a specific price and therefore gives you a more holistic understanding of the price action,
which for day trading is crucial. If we look at a stock like GE, there is a big run-up in
the stock price during the mid-afternoon but the average price during the day (even though it is
increasing during this rally) is still around the 10.75 range for the entire day. When you
factor in the volume of shares traded during this small rally versus the number of shares traded
throughout the entire day you get the VWAP. It's important to notice that the VWAP lags behind.
Now the moving average on the other hand followed the stock all the way up and all the way back
down. When moving averages are calculated even if only 5 or 10 shares are traded during a price
spike the moving averages will come right up. Volume is not taken into account whatsoever
and if you've watched some of my other videos you'll know that I view volume as one of the most
fundamental signals to buy or sell. Without considering volume we cannot get a clear
understanding of the center or median price for that trading day. But, how to use VWAP for day
trading you ask? I use VWAP as a level of support or resistance for day trading if a stock rips up
and i think it's overbought i will short it with my target price being a return to the VWAP line.
So, if you look at gamestop during the short squeeze we had this big break up rising 40
in just one hour. What we can notice, and this is typical for a lot of stocks, is that you'll have
a strong run up and then a return to the VWAP and then maybe you'll have some flat trading
for a while before another run-up and then another return back to the VWAP. Similarly when stocks are
falling and getting into the oversold range we can notice the same pattern a stock will move sharply
down and then return back up to the VWAP then it might either break the VWAP or find resistance at
the VWAP point and have another strong run down if it's unable to break above it. If i'm considering
entering into a day trading position on a stock that has been selling off, one of the first things
I'll look at is how far away are we from the VWAP line because my price target will ultimately be a
return to the VWAP. If the stock is very close to the VWAP or just slightly below it. there might
not be enough potential reward to enter the trade since my target price is the return to the VWAP.
So, I look at my potential reward to risk ratio when considering day trading positions i always
want to have a minimum a two to one reward to risk ratio when i see a stock which is falling
quickly i will wait for a confirmation that the trend is about to reverse to do this properly
what i'm looking for is a candlestick to close green meaning the price for that one minute closed
higher than it opened this confirms the reversal i set my stop loss to the low of the day for example
in jdst once the stock is showing signs of reversing by closing on a green candlestick
i can enter the trade on the next candlestick in this case a round 905. i can then set my stop-loss
to the low of the day which in this example is 8.98 this means that if a stock price dips just 7
cents below my entry at 905 i will be stopped out of the trade with minimal losses my target price
is a return to vwap in this scenario it's hanging out at 9 35 or about 30 above my hypothetical
entry point which i would have only entered after seeing the green candlestick close confirmation
thus i'm risking seven cents which is where i would be stopped out to gain potentially 30 cents
the distance to the VWAP this is approximately a four to one reward to risk ratio and thus is
an attractive trade to take VWAP is famous for being used by huge institutional investors and big
mutual funds the reason these big investors love the VWAP is because these guys buy huge amounts
of shares and if they aren't careful they can have a pretty huge effect on the share price of a stock
just by entering a new position VWAP helps big institutional investors from this happening by
indicating a good position to get in based on the average true price of the stock for that
trading day now besides being used to find price targets VWAP can also be used to find support
and resistance this is fundamental to understand when day trading like i already said so many big
institutions either buy or sell around the VWAP this means that when a stock is falling to the
view off large investors sometimes use a VWAP bounce as their chance to get in and you should
consider doing the same let's say there is a hot stock which is clearly going to have a good day
do you jump in excitedly buy at the high and then watch as the stock stalls out for the rest of the
trading day not that i've ever done that or do you wait for a pullback to the VWAP before entering in
like an intelligent patient investor VWAP bounces are extremely common and often provide a great
entry point for a long position in fact a stock will often have multiple vwap bounces in a single
trading day this is NIO on january 22nd can you spot all the vwap bounces four VWAP bounces in one
trading day remember large institutions sometimes use vwap to buy into new positions therefore you
may see a spike in volume as a stock nearest the vwap and giving you further confirmation of
a potential bounce to hammer this point in here's spce with three distinct vwap bounces in a single
day but vwap does not only act as support it can also act as resistance when a stock has been down
trending here's NIO again this time with the view op acting as a resistance point seven times in one
trading day if you were looking to use the vwap to day trade a good strategy on this day would
have been to short the stock every time it neared vwap with a stop-loss just above the view-off line
and one final example of VWAP as a resistance here's disney and we noticed the same thing but
this time you should be easily able to spot the vwap bounces a great opportunity for day trading
is to short the stock on a downtrend when it is approaching the view op since a downtrending stock
most likely won't have enough buying pressure to break above the vwap and even if it does you have
a stop loss set to just above the indicator this way you minimize your potential risk but still
leave yourself exposed to all the possible rewards and the final way to use VWAP is to determine the
overall strength or weakness of a stock over a certain period of time just remember this
above the vwap equals strength below the vwap equals weakness this should be pretty easy to
spot for day trading keep in mind that any stock which has trended above the vwap for the previous
two days is showing strength and thus you should be considering trading that stock to the long side
here we are looking at netflix since it has been steadily trading above the vwap we should be
looking for places to enter to the long side waiting for a vwap bounce to enter long and
setting a stop loss just below a break of the vwap is a great low risk play conversely if a
sock is broken below the vwap and has been unable to break above it for two days or more it should
be more short biased toward that stock until and if it breaks above here we are looking at gamestop
which has been steadily trading below the VWAP thus we should be looking to short game stop at
least until it starts trading above the view up again a good way to do this is to short the stock
as it approaches the vwap setting a stop-loss at a break just above the vwap to minimize your
potential risk thanks for watching subscribe for more tutorials and i'll see you in the next video