VWAP - Volume Weighted Average Price
Master VWAP indicator for institutional-level trading. Learn deviation bands, intraday strategies, and fair price analysis.
What is VWAP?
Volume Weighted Average Price (VWAP) is the benchmark used by institutional traders to measure execution quality. It represents the true average price of a security, weighted by trading volume.
Unlike a simple moving average, VWAP gives more weight to prices with higher volume, showing where the most trading actually occurred.
VWAP = Σ(Price × Volume) / Σ(Volume)
Calculated cumulatively from the start of the trading session
Why Institutions Use VWAP
- Buying below VWAP = "good" execution (got a discount)
- Selling above VWAP = "good" execution (got a premium)
- Large orders are often benchmarked against VWAP
VWAP and Standard Deviation Bands
Many traders use VWAP with standard deviation bands to identify overextended prices:
+2 StdDev
Extremely overbought
Mean reversion likely
+1 StdDev
Overbought zone
Watch for reversal
VWAP
Fair Value
Equilibrium price
-1 StdDev
Oversold zone
Watch for bounce
-2 StdDev
Extremely oversold
Mean reversion likely
How to Interpret VWAP
Bullish Bias
- Price trading above VWAP
- Pullbacks finding support at VWAP
- VWAP slope is rising
- Buyers in control (willing to pay above average)
Bearish Bias
- Price trading below VWAP
- Rallies getting rejected at VWAP
- VWAP slope is falling
- Sellers in control (selling below average)
VWAP as Support/Resistance
VWAP acts as a magnet for price - it tends to return to VWAP after extended moves (mean reversion). Institutions often place orders at or near VWAP.
How GarudaAlgo Uses VWAP
GarudaAlgo Enhancement
GarudaAlgo tracks price position relative to VWAP and its deviation bands. When price extends to ±2 StdDev bands and shows reversal signals, we factor this into the overall signal probability.
VWAP in Signal System
VWAP is part of the 6% Volume Analysis weight in GarudaAlgo's signal system.
What GarudaAlgo Analyzes
- Price vs VWAP: Above (bullish) or below (bearish)
- Deviation Band Position: How extended from fair value
- VWAP Bounces: Support/resistance reactions
- VWAP Slope: Trend direction confirmation
Trading Strategies
Strategy 1: VWAP Pullback (Trend Following)
- Identify trend direction (price above/below VWAP)
- Wait for pullback to VWAP
- Enter when price bounces off VWAP in trend direction
- Stop loss on other side of VWAP
Strategy 2: VWAP Mean Reversion
- Wait for price to reach ±2 StdDev bands
- Look for reversal candlestick patterns
- Fade the extreme move (sell at +2, buy at -2)
- Target VWAP or opposite band
Strategy 3: VWAP Cross
- A clean cross through VWAP often signals trend change
- Buy on close above VWAP (from below)
- Sell on close below VWAP (from above)
- Best early in the session when VWAP is still forming
Best Practices
- VWAP resets daily — It's an intraday indicator
- Most useful in first few hours — VWAP becomes less responsive as day progresses
- Use with trend direction — Trade pullbacks to VWAP in trend direction
- Deviation bands for extremes — Mean reversion at ±2 StdDev
- Combine with other levels — VWAP + horizontal S/R = strong zone