How to Use VWAP in Day Trading
One of the most popular new day trading indicators is VWAP - the Volume Average Weighted Price.
Imagine you’re watching a stock bounce around on your screen, and you’re itching to jump in—but how do you know if the price is right?
VWAP might be solution you need. It’s been a game-changer for professional traders.
And many of T3’s professionals, like Chief Strategic Office Scott Redler and JR Romero of the Momentum Express VTF®, make regular use of VWAP in their active trading.
Thanks to the wonders of technology, VWAP is in the hands of retail players like you. Perhaps one day, VWAP will be as popular as moving averages, Bollinger bands, and RSI.
In this trading indicator deep dive, we’ll explore what VWAP is, its history, how to use it to buy and sell stocks, its pros and cons, and the criticisms it faces.
You’ll see exactly how VWAP can fit into your trading toolbox, and importantly -- how to start with VWAP the smart way.
Let’s get started.
What Is VWAP?
VWAP stands for Volume Weighted Average Price.
In plain English, VWAP calculates the average price a stock has traded at throughout the day, weighted by the volume of shares traded at each price.
Here’s the formula:
VWAP = (Cumulative Price × Volume) / Cumulative Volume
And so we're clear about what each item means:
- Cumulative Price × Volume = the sum of the product of price and volume for each trade, of the current trading day
- Cumulative Volume = the total volume of the current trading day
Unlike a basic moving average that just tracks price, VWAP tells you what the market’s been willing to pay, factoring in how much volume each price level saw.
It’s almost like a 3-Dimensional look at the demand level for a stock.
Let’s say NVIDIA (NVDA) (trades 1,000 shares at $50 and 2,000 at $51, VWAP leans toward $51 because more volume happened there.
Institutional traders often use VWAP it to judge their execution quality—did they buy cheaper than the average?
And retail traders like it as a dynamic guide for entries and exits.
You’ll find it on virtually every modern trading platform and/or charting service like Trendspider, Koyfin, Thinkorswim, TradingView, or Interactive Brokers.
The History of VWAP
VWAP’s story begins in the late 1980s, when Morgan Stanley trader Kyle Krehbiel wanted a better way to measure big trades.
Back then, institutions moving millions of shares couldn’t just dump orders without tanking the price. Krehbiel’s solution was to create VWAP -- a metric that blended price and volume to show the “true” average cost.
By the 1990s and 2000s, as electronic trading and algorithms took over, VWAP became a star. Firms like Goldman Sachs and hedge funds adopted it to fine-tune their strategies, turning it into a benchmark for success.
Fast forward to today: VWAP is everywhere. Take Tesla (TSLA) on a busy earnings day—traders use VWAP to see if they’re getting shares below the day’s average amidst the chaos. It’s evolved from a Wall Street secret to a staple for anyone with a brokerage account, reflecting how markets have grown faster and more data-driven.
How to Use VWAP to Buy and Sell Stocks
So, how do you trade with VWAP? Think of it as a moving target for “fair value”—a line that shifts with the day’s price and volume. It acts like dynamic support or resistance, helping you spot opportunities. Here’s how to wield it, with examples to bring it to life:
- Buying with VWAP: When a stock dips below VWAP, it might be undervalued—a signal to buy. Imagine you’re trading NVIDIA (NVDA) on a Monday morning. At 10:15 AM, NVDA’s at $120, but VWAP sits at $122. The price drops to $119 with a surge in volume—a classic dip below VWAP. You check the chart: a hammer candlestick forms, and RSI shows oversold conditions. You buy 50 shares at $119. By 11:00 AM, NVDA rebounds to $123. You’re in the green, thanks to VWAP spotting that undervaluation.
- Selling with VWAP: When the price climbs above VWAP, it might be overbought—a cue to sell. Say you’re holding Apple (AAPL) during a midday rally. At 1:30 PM, AAPL hits $175, while VWAP lags at $172. Volume’s steady, and the stock’s been trending up since noon. You sell 100 shares at $175, locking in a profit as it peaks. By 2:00 PM, it drops back to $173—VWAP helped you exit near the top.
Practical tips: VWAP shines in intraday trading, like day trades or scalps, but it’s shaky early in the session. At 9:35 AM, with low volume, VWAP can mislead you—so wait an hour for it to stabilize. Pair it with tools like volume spikes or news (e.g., a Fed announcement) for better odds. It’s not a standalone oracle, but it anchors your decisions.
The Pros and Cons of VWAP
VWAP has some big advantages for serious day traders, but it’s not flawless. Let’s break it down using some hypothetical examples.
- Pros:
- Volume-weighted: It captures market reality. If 10,000 shares of Microsoft (MSFT) trade at $300 versus 1,000 at $305, VWAP reflects that $300 matters more.
- Benchmarking: Institutions love it—did they buy MSFT below VWAP at $298? Score. Retail traders can use it too: “I got long at $297—beat the average!”
- Trend confirmation: On a choppy day, VWAP acts like a lifeline. If Amazon (AMZN) holds above VWAP at $204, the uptrend’s intact.
- Accessibility: It’s free on most platforms—no premium account needed.
- Cons:
- Lagging nature: VWAP is historical—it won’t call Tesla’s next breakout. If TSLA gaps up on news, VWAP trails behind.
- Intraday only: Swing traders holding NVDA overnight won’t care about a daily reset.
- Early-day quirks: At 9:45 AM, with thin volume, VWAP can’t give you an accurate read on anything.
- Over-reliance risk: A sudden Elon Musk tweet or even an analyst upgrade/downgrade can flip Tesla’s chart, and VWAP won’t see it coming.
Criticisms of VWAP
Not everyone is sold on VWAP. And that's fair because no indicator is a magic silver bullet.
Some traders argue it’s built for the big dogs—think hedge funds dumping 500,000 shares of SPY (the S&P 500 ETF).
Retail traders with 10 shares might feel outmatched, especially when algorithms pegged to VWAP push prices around.
Take a low-volume stock like a small-cap biotech: VWAP might hover at $5, but a single 1,000-share trade at $6 skews it—that’s completely useless for timing.
Then there’s volatility. VWAP doesn’t help much during wild stock moves.
During GameStop’s (GME) 2021 squeeze, VWAP lagged wildly as prices soared from $20 to $300 in hours - so traders relying on VWAP got burned. Critics also blame its overuse: with algos chasing VWAP, short-term price action can look like a signal when it’s just noise.
Related: What Is Anchored VWAP?
You may have heard the term Anchored VWAP, a related indicator which is also becoming more popular.
Anchored VWAP is very similar to "regular" VWAP.
But with Anchored VWAP, the trader decides when to make the starting point of the VWAP calculation -- like a specific time of day or a certain price level.
Conclusion: VWAP Is Helpful, But Perhaps Not a Magic Bullet
VWAP is a powerhouse. It’s a blend of price and volume born in the shadowy world of institutional trading, and now it’s yours to master. Whether you’re sniping dips below it on Netflix (NFLX) or selling rallies above it on Apple (AAPL), it gives you a clear lens on the day’s action. It’s not perfect—lagging, intraday-focused, and sometimes swayed by the big players—but paired with other tools, you can get a sharp edge over your competition..
Ready to test it? Fire up a demo account on Trendspider or TradingView or wherever, pick a stock like Reddit (RDDT) or SPY, and watch VWAP in action. See what happens when VWAP dips below with volume support, when it gets overstretched.
Trading is about finding what works for you. VWAP might be it. However, as with all trading indicators, it is wise to study before you put real world money to work based on your observations of VWAP.
How to Learn About Moving Averages
If you’d like to get a better understanding of how moving averages can be used to find winning trade ideas, check out Scott Redler’s free eBook “The Ultimate Guide to Moving Averages.”
