Does the VWAP Indicator Work? I Backtested It To See! (2024)

FAQs

Does the VWAP Indicator Work? I Backtested It To See!? ›

VWAP Backtesting Results

It looks similar to a moving average line but smoother. VWAP represents a view of price action throughout a single day's trading session. Retail and professional traders may use the VWAP to help them determine intraday price trends. VWAP typically is most useful to short-term traders.

Limitations of VWAP

Lagging indicator: As a moving average, VWAP is inherently lagging and may not accurately reflect sudden price changes. Limited predictive value: VWAP is not a predictive tool and should not be solely relied upon for trading decisions.

There are many ways to trade with the VWAP. Again, it works best when combined with other complementary indicators including momentum indicators like MACD or stochastic.

For intraday trading, the best way to use VWAP is by initiating a buy order when the price falls below it and executing a sell order when the price rises above. Given that prices are subject to fluctuation during the day, vigilant monitoring of these changes is crucial for successful trading.

The Volume Weighted Average Price (VWAP) indicator didn't yield profits for day traders using standard candlestick/OHLC charts, resulting in a 30% win rate. However, TrendSpider showed that when paired with a Heikin Ashi chart, it showed promising results.

The VWAP is displayed as a line, similar to a moving average. On the chart, it's the purple line that goes through prices. Remember the VWAP is an average, which means it lags. Typically, when VWAP slopes up, it indicates prices might be trending up, and when it slopes down, prices might be trending down.

General Strategies

If the price is above VWAP, it is a good intraday price to sell. If the price is below VWAP, it is a good intraday price to buy. However, there is a caveat to using this intraday. Prices are dynamic and what appears to be a good price at one point in the day may not be by day's end.

The VWAP indicator shows the stock's equilibrium, and the stock will always come back if it moves too far away from it in either direction.

Importance of Volume Weighted Average Price

The market is bearish when the price is below the VWAP and bullish if the price is above the VWAP. During a bullish market, there will be an increase in the buying price, and the trend line on the chart will move upward.

Do swing traders use VWAP? ›

Swing and position traders use the VWAP in the same way as a moving average.

Traders may choose to anchor VWAP to a significant event that is likely to impact the stock's price movement, such as an earnings announcement, product launch, or other news events.

Note: You cannot apply the VWAP technical indicator to Price Distribution and Tick charts. VWAP applied to a spread chart is based on price updates to the spread chart. Each price update on either leg of a spread chart is assigned a volume value of one.

In the example below, we use the 5-minute time frame and enter if price is at least 1.5% below the VWAP. We're looking to play a very quick bounce here, so we exit 1 candle later and we get a return of 3.52% over the time period tested. This beats all of the 5-minute bullish strategies that we tested above.

How Do You Interpret the Anchored VWAP? Like traditional VWAP, the Anchored VWAP overlay can confirm trends and identify areas of support and resistance on the price chart. The advantage of using Anchored VWAP is that you can set the starting point to include only relevant data on your chart.

We hear about the V-W-A-P order, volume-weighted average price order, all the time. Here's the way that you can actually trade that the way that you want, when you want, one line, here through Active Trader Pro.

The VWAP is used by traders to evaluate price and volume to determine entry and exit points. It can also be used to whether there are any trends or overlying sentiments in the market. It isn't bullish or bearish on its own. Rather, it points to a bullish trend if prices and volumes rise and bullish if they drop.

If the price is above VWAP, it is a good intraday price to sell. If the price is below VWAP, it is a good intraday price to buy. However, there is a caveat to using this intraday. Prices are dynamic and what appears to be a good price at one point in the day may not be by day's end.