The Volume Weighted Average Price (VWAP) technical indicator is a useful tool for day traders who want to make more informed trading decisions. With this indicator, the day trader must input certain required data which the software will then use to calculate the volume weighted average price. The unique thing about this software is that it is heavily dependent upon trading volume which makes it more accurate for calculating average trading price.
You would first need to decide on which time period you want to use for your analysis eg. 1 minute, 5 minutes, 30 minutes etc. At each time interval, you would need to calculate the price average. To do this follow the following steps:
- Add the current high, low and close and divide the result by 3 to arrive at the typical first period price.
- Multiply the typical price (TP) by the volume to arrive at the TPV. Do this for each period.
- Calculate the cumulative TPV by adding the most recent TPV to the total of the previous values.
- Also calculate cumulative volumes by adding the most recent volumes to the total of the previous volumes.
Calculate the VWAP by dividing the cumulative TPV by the cumulative volume. This information may then be used to plot the VWAP chart.
One of the best ways to use the VWAP is to use it at significant breakout points. This typically happens when there are press releases or significant earnings announcements. With the VWAP indicator, good long entries are those points where the prices are lower than the VWAP. On the other hand, good short entries are those points where prices are higher than the VWAP. The current VWAP tends to function as possible resistance and support levels.