Why is VWAP So Important for Day Traders?
VWAP provides a single, objective benchmark for the "fair price" of the day. This simple concept leads to several powerful applications:
1. Determining Market Sentiment: This is its primary use.
· Price ABOVE VWAP: Indicates bullish sentiment. Buyers are in control and are willing to pay a premium.
· Price BELOW VWAP: Indicates bearish sentiment. Sellers are in control and are selling at a discount.
2. Institutional Benchmark: Large institutions (like pension funds, mutual funds) use VWAP as a target price to execute their large orders. Their goal is to get an average price at or better than the VWAP. This creates self-fulfilling areas of support and resistance.
3. Dynamic Support and Resistance: The VWAP line itself acts as a key level throughout the day. In an uptrend, it often acts as support. In a downtrend, it acts as resistance. Bounces and breaks of the VWAP are significant trading signals.
4. Trade Entry and Exit Confirmation: Traders use the VWAP to confirm the strength of a move and find high-probability entry points.
