What is VWAP?

The Volume-Weighted Average Price (VWAP) is the average price of a stock over the trading day, weighted by volume. Unlike a simple moving average that treats every candle equally, VWAP gives more weight to prices where the most shares changed hands.

This makes it the benchmark that institutional traders and algorithms use to evaluate whether they got a "good" fill on their orders.

Why VWAP matters

Institutions aim to execute orders at or below VWAP (for buys) and at or above VWAP (for sells). This creates a self-fulfilling dynamic:

  • Price above VWAP: buyers who filled below are in profit, creating confidence and potential support
  • Price below VWAP: buyers who filled above are underwater, creating selling pressure

VWAP essentially divides the trading day into "winning" and "losing" territory for the majority of volume.

VWAP as a trading tool

Directional filter

The simplest use: only take long trades when price is above VWAP, and short trades when price is below. This keeps you aligned with the prevailing volume flow.

Support and resistance

VWAP often acts as intraday support or resistance. Price approaching VWAP from above frequently bounces off it as institutional buy programs kick in near the average price. The reverse happens for price approaching from below.

Mean reversion

Stocks that deviate significantly from VWAP tend to revert toward it, especially during low-momentum periods. This creates opportunities for mean-reversion trades in the middle of the day.

VWAP limitations

  • Intraday only: VWAP resets every day. It has no meaning across multiple days.
  • Lagging: as a cumulative average, it becomes flatter as the day progresses and less responsive to new price action.
  • Not a standalone signal: VWAP tells you context (where the volume-weighted average is), not direction. Combine it with price action, level 2 data, or other indicators.

VWAP bands

Standard deviation bands around VWAP (similar to Bollinger Bands) mark zones of overextension. The first standard deviation band captures roughly 68% of price action, and the second captures 95%. Price reaching the second band often signals an extended move ripe for a pullback.

Key takeaway

VWAP is the line that separates "good" from "bad" entries for the majority of market participants. Trade with it, not against it. Use it as context for your entries and exits, not as a trigger on its own.