I looked through millions of Youtube videos, trading blogs, and even some trading books
to see if I could find the best indicator out there. The most efficient, effective,
and highest win rate indicator in the trading world. and to be honest, it wasn t easy.
Turns out, a lot of trader s have different opinions on what the best indicator is, not
surprising. and there s not really a direct answer. All indicators have their ups and
downs. On top of that, you should never really rely on just one indicator. So it s really
tough saying one s better than another. But with that said, I think I found one.
Now, I m almost certain, if you ve been in the trading game for awhile, you have definitely
heard of this indicator. But if you re like me, you might have overlooked it, and never
really took a deep dive into understanding it better.
What s the indicator? The VWAP. VWAAP? No VWAP. IF you say VWAAP, I m sorry we cant
be friends. If you haven t heard of it, well, you re in
for a treat. IF you have heard of it before, you re still going to want to watch this.
If you re like me, you might have a slight ego and say
ohhh no I know that indicator well enough already, I don t need to learn more about
it. Well that s where you re wrong. That s actually
where a lot of traders start to fail. They get comfortable with where they re at and
stop trying to improve. So I deeply suggest watching this video, because you ll probably
learn something you didn t know before. And at the end of the video I ll tell you
strategy to make the VWAP even more effective than it already is.
So the VWAP, the volume weighted average price. Think of it as just regular old moving average,
but UPGRADED. The reason being, it take s volume into consideration rather than just
previous price. And if you ve watched my videos before. You all know why we like volume so
much. Volume is king. Now, I want you guys to think of it like this.
Say if we have a chart. Price A is at $20, and price B is at $40. So just a normal uptrend.
Now let me ask you guys something. What s the average price between the two points?
(math gif) $30 right? $30 is right in the middle of the two points and is the average
price on the chart. What I just described, is a moving average.
A moving average just finds a certain amount of past candle sticks, looks at the prices
of them, determines the average price, and draws a
line there. Now let s go back to the chart, and we are
going to keep the same exact price points. Except this time we are going to add a little
more information. Let s say at point A there was 100 shares
of volume, but at point B there was 10,000 shares of volume. Now let me ask you the same
question again. Is the average price really $30? We ll sure, on the surface, yeah, $30
is the average. But this volume metric can tell so much more
of a story than an average price ever could. And if you re asking me, the impact on point
B was so much more than point A. So in my mind, the average is actually up here closer
to Point B. So in other words, the VWAP is saying, hey,
I don t really care about this $30 number, I care about where more people are entering
and exiting. That s really the beauty of the VWAP. But those are just the basics, lets
take a deeper dive and get a little bit more advanced on why the VWAP is one of the best
indicators out there. The VWAP is one of the most installed indicators
in the trading world. So millions of traders have the same exact line on their chart as
you do. So whenever trading, there s going to be a
lot of eyes when that price hits the VWAP level. Hopefully you guys understand on why
that s so important. Also one very important thing you must know
about VWAP is that a lot of institutional banks and mutual funds like to place their
orders around the VWAP. Because typically the VWAP expresses the most amount of liquidity
because theres more people willing to trade at that price. So the institution banks and
mutual funds can get in and out of their trades with the least amount of market impact as
possible. Which is pretty important for entities like this.
Which brings me to my next point. The confirmation of the VWAP. Now, the only reason technical
analysis works, is because people believe it works.
If people didn t believed it worked, it would just be a bunch of random lines on a chart.
With say that, I already know there s a lot of people out there that believe technical
analysis is just a bunch of bs, and basically just a bunch of random lines anyways.
(insert Brian) But you cant deny the fact, if enough people
believe in those certain lines, the price will react to them.
For instance, the dollar bill, is worth nothing. It s just a piece of paper. The only reason
it is worth something is because we all believe its worth something. Same goes with trading.
Take support and resistance for example. The only reason a support works, is because lots
of people see past chart history and can pin point where those specific areas are.
That s why I always say when drawing support and resistance lines, to pick the spots that
come out to you first. The most obvious spots. Because the more obvious they are, the more
people drawing those same exact lines. Giving those areas more power.
But that is one of the draw backs of support and resistances. Not everyone is drawing the
same lines. Now think of it like this, if the VWAP is
one of the most installed indicators in the world, and it s on the same exact level on
everyone s screen. So there is absolutely no confusion on where it. Don t you think
price will respect it? To figure this out I did some testing.
VWAP is dead simple. The price is either above it or below it. When it comes to day trading,
simplicity often rules. Now as a type of backstory on trading with
the VWAP. Usually it determines if the market is considered in uptrend or downtrend. if
the price is above the VWAP, it s considered an uptrend. If the price is below the VWAP
it s considered a downtrend. So the VWAP can act as both a support and
resistance. When the price is above, it will act as a support. If the price is below, it
will act as a resistance. Now, I did some digging. And I checked so
many charts just to see how powerful the VWAP actually was and if price actually respected
it. And to be honest, it s actually pretty scary
on how much the price respects the VWAP. Like in the example, I was day trading. The
market opened and price did a huge spike, making it way above the VWAP (the purple line),
it started heading back down correcting itself, and guess where it bounces? The VWAP.
Same thing here. You can see the price fell below the VWAP, and when started making its
reversal, it headed all the way back up, hit the vwap as a resistance, and headed back
down. And these types of plays happened A LOT.
Now it s also important to know that VWAP is an intraday indicator. You cant really
use it on daily charts, because it uses intraday candles and intraday volume to calculate the
line. So it s not really meant for long term investing,
but more so for day trading and scalping. For day trading it will typically look like
this. Where the VWAP will have a huge exponential spike right when the markets open. Then over
the next couple of hours it will slowly start to level out.
You can almost think of the VWAP as a magnet. The price always wants to go towards it. So
if the price has a big spike, and goes way above the VWAP. It will naturally want to
go back down towards it. Same thing if it fall down too fast, it will
naturally want to go back up towards it. It s also important to note the first time
price touches the VWAP, is the time you can have the most confidence.
Whenever the price first comes near the VWAP, it will more likely than not, respect it.
It will rarely just break through the first time. As time goes on, and price hits the
vwap more and more, it will become less and less likely to hold.
So when day trading, it can be a great support for the first bounce.
Same thing goes for when price is below, the first time price comes up to it, the stronger
the resistance will be, as time goes on, the weaker it ll be.
Now of course price isn t always going to respect the VWAP exactly, every single time.
There are going to be times where it does these little false breakouts, where price
breaks through, making you think we are in uptrend, but then slowly starts fading back
downwards. Creating a bull trap. So I think it is important to understand to
not to treat the VWAP or any indicator for the matter as an exact science. You should
be treating as a guide. So this whole false breakout thing is definitely
one of the major problems with the VWAP. But luckily for you there is a way to make the
VWAP even more reliable and raise your win percentage using it.
It s pretty simple actually. So usually when these false breakouts happen, its because
the overall stock is actually in a downtrend. So this is it trying to reverse, but the downwards
momentum is just too heavy. To fix this all you re going to do Is have
your VWAP line, then you re also going to add a 200 moving average. Now the only rule
for this strategy is you will only trade if the price is above the 200 moving average.
So if you want to do say I don t know a bounce play trade, where you buy when the price dips
and hit s the vwap for the first time as your expecting it to head back up.
You can only do that trade if the price is also above the 200 moving average. If it s
below you can t take that trade. This will greatly improve your chances of
entering in a winning trade, as your only trading in a true uptrend, and you won t get
as many false breakouts. Now of course, you should never use just one
indicator. You should be using multiple to help make your trading decisions. Indicators
are not an exact science, so don t treat them like that.
But those are some reasons why I think the VWAP is the best indicator. What do you think
is the best indicator? Let me know in the comments.
So I told you a little bit on how to trade certain stocks with the VWAP, but how do you
find good stocks in the first place? Well in this video I tell you the exact characteristics
of good stocks, and how to find stocks to day trade every single morning, so you can
start with one foot in the right direction. Go check that out, thanks for watching, and
I ll see you guys next time.