An intraday volume-weighted average price plotted from 9:30am ET to 4:00pm ET is the most common VWAP that traders use, and it’s still pretty powerful on its own.
The manner in which it’s calculated — as we discuss in the Roadmap — makes it a driving force in day-to-day market activity. By maintaining the same initiation point and building upon itself as time progresses, every share transacted is factored in.
Simply put, it’s the market’s true average price over the entire trading day.
Bring in the deviation bands.
Plotting standard deviation bands alongside VWAP create a virtual grid system on our charts, through which we can objectively determine how far we’re trading from the market’s average price.
Price tends to behave differently at varying distances, and the deviation bands oftentimes serve as barriers separating those contrasting regions. The result? Areas of otherwise hidden support and resistance.
VWAP, but make it longer.
One of the biggest misunderstandings about VWAP is that it’s only applicable on an intraday chart. In reality, you can and should be anchoring volume-weighted averages to prior days as well.
Whether it’s yesterday’s open or a company’s last earnings date, long-term VWAPs capture market sentiment over a relevant time frame and add invaluable context to our trading as a result.
Sorting through opportunities.
The combination of these concepts allow us to segment market behavior, make higher probability assumptions about upcoming chart movements, and identify areas of support and resistance that can be used for trade entries and exits.
From there we assess the quality and likelihood of success of potential setups using a variety of metrics and methods, including the one shown here — the slope of VWAP.