Recently in my trading journey, I decided to investigate VWAP and understand why it matters. I’ve heard the term for quite a while but I never really thought it applied to my trading style until recently. If it’s your first time seeing that acronym you might think it’s just another silly technical term to add to your vocabulary. But it’s more than that! In fact, once you learn it you’ll find it can be extremely helpful.
Now that I have your attention, you’re probably wondering what does VWAP stand for? I encourage you to continue reading and you’ll discover why it is one of the most powerful tools in a trader’s arsenal. It’s not just another moving average, VWAP combines both price and volume to give you the market’s “true” average price over a selected period. This makes it a go-to indicator for professional day traders, scalpers, and swing traders alike.
What is VWAP?
VWAP stands for Volume Weighted Average Price. Unlike a simple moving average, VWAP weights each price level by the trading volume at that level. This means it reflects where most of the money has actually been traded, making it a more accurate representation of fair value for the session.
Benefits of Using VWAP
- Identifies Fair Value: VWAP acts as an intraday benchmark, showing where the majority of trading has taken place.
- Dynamic Support & Resistance: Price often reacts around VWAP, making it useful for trade entries and exits.
- Trend Confirmation: Price staying above VWAP suggests bullish bias; below VWAP suggests bearish bias.
- Improved Timing: Helps avoid chasing trades by showing overextended moves relative to average price.
- Professional Standard: Institutional traders often use VWAP to measure execution quality.
How to Use VWAP in Your Trading
- Trend Direction: If the price is consistently above VWAP, focus on long opportunities; if below, look for shorts.
- Mean Reversion: After strong moves away from VWAP, watch for price to revert back toward it.
- Band Usage: If using VWAP with standard deviation bands, look for price to bounce or reverse at ±1σ or ±2σ levels.
- Session Resets: VWAP typically resets at the start of each trading session for the most relevant data.
Searching for a Free VWAP Script for Ninja Trader?
If you’re in search of a new indicator to add to your chart you’re in the right place! We created this custom script to help you on your trading journey so that you’ll have a better understanding of the market. The download is free and you’ll find the installation instructions below.
Installing the Custom VWAP Indicator in NinjaTrader 8
Follow these steps to add the Ads4Dads_VWAP_Bands indicator to your NinjaTrader 8 platform:
- Download the indicator file at: https://github.com/Ads4Dads/Custom-VWAP-indicator-for-Ninja-Trader from our GitHub repository.
- Open NinjaTrader 8 and go to New → NinjaScript Editor.
- Right-click on the Indicators folder and select New Indicator….
- Name it Ads4Dads_VWAP_Bands and click OK.
- Paste the entire code into the editor, replacing any default text.
- Click Compile (F5) to build the script without errors.
- Open your chart, right-click, and select Indicators.
- Find Ads4Dads_VWAP_Bands in the list, configure the settings in the UI; (turn inner/outer bands on or off, sizing, colors, styles, other helpful settings), and click OK.
What Our VWAP Does
Our custom VWAP for NinjaTrader includes:
- Auto-colored VWAP line (green above price, red below price)
- Optional standard deviation volume-weighted bands (±1σ and ±2σ)
- Independent toggles to hide/show bands
- Customizable session reset and price calculation (Typical Price or Close)
FAQs about VWAP
VWAP stands for Volume Weighted Average Price. It calculates the average price of a security based on both price and trading volume during a specific period, usually one trading session.
VWAP shows the true average price where most trading occurred, making it a benchmark for fair value. Traders use it for identifying trends, spotting reversals, and timing entries or exits.
While a moving average calculates the average of closing prices, VWAP weights each price by the amount of volume traded at that level, providing a more accurate reflection of market activity.
Yes. Scalpers use VWAP to find quick opportunities when price moves away from VWAP and returns to it, or when it breaks above/below VWAP with strong volume.
Final Thoughts
VWAP is more than just a line on your chart, it’s a key reference point that helps you understand where institutional and retail traders are interacting. By combining VWAP with volume and price action analysis, you can gain a significant edge in timing your trades.
Disclaimer
This indicator is provided for educational purposes only. Trading financial instruments involves significant risk of loss and is not suitable for all investors. Always do your own research and consult a licensed financial advisor before trading. Use at your own risk.
VWAP Trading Strategy - BEST INDICATOR for Beginner Day Trading
Did you see our previous article about Day Trading? If not, check out: Becoming a Successful Day Trader Part 3: Remaining Patient
