VWAP can be defined as “Volume Weighted Average Price” and it is mainly used for identifying the actual average price of the stock by the factoring volume in the equation.
You would not get a clear picture of the health of the stock by finding the price on the basis of the closing value of security.
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This is when the VWAP may add value than the standard moving average indicator as VWAP reacts to the movements in price on the basis of the volume of a particular period.
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Reasons why Day traders love VWAP
#1 With the help of VWAP the traders may buy at a low rate and sell at a higher one
In case your tech trade strategy penetrates buy signal, you may probably execute order and then leave outcome to prayers and hopes. But the day traders who are professional and experienced never place an order when the systems are generating trading signals. Instead, they just wait patiently for move favorable pricing before pulling trigger.
If you notice a low price as per the VWAP indicators and if you buy the stocks at market price, then you would just be paying the average price for the stocks for that particular period.
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#2 VWAP may indicate a change in the market bias
Buying low and selling high is a wonderful strategy but if you consider yourself to be a momentum trader, then you may buy the stocks while the price is still shooting up.
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VWAP cross which is a VWAP strategy would help you in trading the momentum in the market.
#3 The day traders now have a unique methodology on the basis of the VWAP indicator
VWAP weight average price is a very simplified equation which is being used increasingly for retirement pension on average for the investors. It is calculated through amount of each transaction price multiplied by the total number of shares that are traded. Thereafter this amount is divided by total number of shares in a day.
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#4 VWAP is the latest tool for the day traders
Making full use of technology is a strategy which offers a buying indicator. With the help of the VWAP indicator is quite reliable. Technological methodology basically triggers you for buying at a particular time when shares are showing the fair market price accurately. VWAP permits you to buy always low consistently. Even when you shorten the stocks you can easily sell at a high price.
#5 VWAP indicator offers support as well as resistance
Day traders are quite fond of VWAP indicator as many a times the price is able to get support as well as resistance around VWAP itself. If you will combine VWAP with a simple pricing action, the VWAP strategy would help you in finding dynamic assistance as well as resistance level in the stock market.