*****This is a guest blog submission from Jordan Caroleo – @Jordar411***** — Editor’s Note
One of the best studies I use during the course of my trading is the VWAP. VWAP = Volume Weighted Average Price. What is this? Basically, the measure of average price throughout the day that is specific to volume. This is crucial for intra-day traders (and longer time-frames alike) because of the number of ways you can use it for confirmation.
1.) Relative strength in regards to VWAP.
Traders can identify the relative strength (RS) in a stock in regards to the VWAP. Is your stock actively testing it’s VWAP trend-line but cannot cross above/below? Is it testing over/below and failing/holding? These are things to consider when using VWAP in regards to RS.
2.) Confirmation for intra-day changes in trend.
VWAP can help you confirm new sellers and new buyers. For example, if your stock has been trending lower (would be below VWAP) in the morning but catches a bid and trends higher (potentially crossing over VWAP) you can guess that new buyers have come into the name to support. Likewise for the opposite. I personally look for plays that have multiple tests against the VWAP. Once I get the confirmation of the crossover and holding, that is an area of interest.
3.) Using VWAP to identify “bagholders.”
For many, (especially funds & larger players) VWAP is the volume based break-even point for the bagholders. As stock moves lower below VWAP to new lows (this example is a long situation). Similar to a squeeze, these longs start toliquidate, creating a steeper VWAP. A lot of traders use the VWAP as a stop, which is also acceptable.
$CLF drives lower after testing its VWAP. This is a play on relative weakness. Using this along with other key factors (catalyst, sector/market correlation, etc) you can build confirmation entering and exiting your trades.
$GILD drives higher with support at the VWAP. What I like about this example is the multiple tests against it as well.
These are just a few points on why VWAP is crucial to intra-day trading and analysis. You cannot trade SOLELY on VWAP, but it is very helpful for confirmation and thesis-building.
no relavant positions
