What it means
VWAP is the average price of the session weighted by volume: the sum of (typical price × volume) divided by total volume, reset at the session start. Typical price = (high + low + close) / 3.
Anchored VWAP starts the same calculation from a chosen candle instead of the session start.
Why traders use it
Many execution desks benchmark against VWAP, so price above it means buyers have paid more than average today. Traders read it as a dynamic fair-value line.
Chart examples
VWAP with volume
How to identify it objectively
- 1Use the session definition of your market.
- 2Price above VWAP: buyers in control on average; below: sellers.
- 3First pullbacks to VWAP in a trend are watched as entry areas.
- 4Anchored VWAP from a major swing shows the average cost since that swing.
Bullish use
- 1Price holds above VWAP.
- 2A pullback tests VWAP from above and holds.
- 3Enter on the bullish close; stop below VWAP minus a buffer.
Bearish use
- 1Price stays below VWAP.
- 2A rally tests VWAP from below and fails.
- 3Enter on the bearish close; stop above VWAP plus a buffer.
What confirms it
- A clean hold on the first test.
- Volume falls on the pullback.
What invalidates it
- Price chops back and forth across VWAP: no trend.
How a hypothetical setup is built
Entry
On a rejection close at VWAP in the trend direction.
Stop
Beyond VWAP plus a small ATR buffer.
Target
The session high (or low), or an anchored-VWAP band.
A hypothetical illustration of how the concept is turned into a plan, not a recommendation. Practise it on a paper account first.
Related concepts
- Technical IndicatorsATR (Average True Range)
- Technical IndicatorsOn-Balance Volume (OBV)
- Technical IndicatorsPivot Points
Historical testing
Not tested on The Tradeskill. Note that for spot gold and many crypto feeds, volume is exchange-specific, not consolidated, which changes VWAP.
Limitations: when it fails
- Volume data quality differs by market and feed.
- Less meaningful late in the session as it becomes slow to move.
- Range days cross VWAP repeatedly.
Knowledge check
Pick an answer to see the explanation. Nothing is saved.