Volume Weighted Average Price (VWAP) trading indicator

Volume Weighted Average Price (VWAP) is a technical analysis indicator that shows the average price of an asset weighted by the volume traded at each price point, which is used to identify trends and potential break-out or pull back points.

Formula:

VWAP = (Cumulative(Typical Price x Volume)) / Cumulative(Volume)

Key Takeaways:

1. Traders use VWAP to identify the average price of a security for a particular period.
2. VWAP is used to confirm trend direction and potential break-out or pull-back points.
3. VWAP is particularly useful for intraday traders, helping to estimate the current market price relative to the average trading price for the day.
4. An important advantage is that VWAP combines volume and average price calculation.
5. VWAP can be used in identifying areas of high volatility.
6. VWAP can also be useful for measuring trade execution performance depending on whether an order is placed below or above the VMAP line.

Counterarguments:

1. VWAP is less reliable when trading volume is low.
2. VWAP can generate lagging signals.
3. VWAP is a one-day indicator and is restarted at the opening of each new trading day, so it is not suitable for analyzing long-term trends. It can be difficult to use as a stand-alone strategy.