72% of Traders use VWAP
The 'Holy Grail'
Given the day that's in it, I wanted to point to a couple of large statistics around VWAP and talk a little about what it is and why it is such an important benchmark.
Not only the day timeframe but across multiple time periods. I'm always amazed by how little people actually know about VWAP and why it's important. There are some really great research papers that speak to its strength as a tool, but there are very few places where you can dive deep on the understanding of how to use it in intraday and higher timeframe trading environments. Have a read of this research paper from Carlo Zarattini and Andrew Aziz, looking at how strong the intraday performance is of utilising a vwap strategy.
If we want to point to further importance, Citadel use VWAP as one of their core algo offerings to its clients.
With 72% of traders using VWAP for execution and efficiency, we can not disregard market dynamics around this tool. The stat comes from a research paper by Best Ex research who are in the space of Algorithmic algo trading efficiencies
Unlocking Market Dynamics: VWAP Across Timeframes
VWAP (Volume Weighted Average Price) is a powerful tool for understanding market dynamics, and its usefulness extends beyond just intraday trading. While commonly used by day traders, VWAP also provides valuable insights on higher timeframes, particularly for large institutional traders.
Here's why VWAP is important across different timeframes:
Reveals the "True" Average Price: Regardless of the timeframe, VWAP weights each price by the volume traded. This reveals the price where the most significant trading activity occurred, providing a more accurate picture of market consensus than simple averages.
Identifies Intraday and Higher Timeframe Bias: On intraday charts, price relative to VWAP helps gauge short-term momentum. On higher timeframes (daily, weekly, monthly), VWAP can reveal longer-term trends and biases. Consistently trading above or below a higher timeframe VWAP can signal a significant shift in market sentiment.
Provides Dynamic Support and Resistance: VWAP acts as dynamic support and resistance on all timeframes. On higher timeframes, these levels become even more significant, as they represent longer periods of price acceptance or rejection.
A Benchmark for Performance (Especially for Institutions): Large institutional investors use VWAP on higher timeframes to assess the quality of their order execution over longer periods. This helps them minimize market impact and achieve better average prices on their large positions.
Identifying Balance, Imbalance, Expensive, and Cheap Prices (Institutional Use): This is where the power of higher timeframe VWAP truly shines. Institutional traders use VWAP to identify:
Balance: When the price is consistently oscillating around the VWAP, it suggests a period of equilibrium where buyers and sellers are relatively balanced.
Imbalance: A sustained move away from VWAP indicates an imbalance, with either buyers or sellers exerting significant control.
Expensive/Cheap Prices: Prices significantly above a higher timeframe VWAP can be considered "expensive" relative to the average price over that period, while prices significantly below can be considered "cheap." This helps institutions identify potential overbought or oversold conditions.
By understanding VWAP across different timeframes, you gain a much deeper understanding of market dynamics and the behavior of large institutional players. This knowledge can significantly enhance your trading process, regardless of your trading style. To learn more about advanced VWAP strategies and applications, consider exploring dedicated training materials or subscribing to this report.
New website for The Vwap Report.
Alpha Edge VWAP - Complete intraday and higher timeframe VWAP strategy, execution edge.