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Whether you are a new or experienced day trader, you have undoubtedly heard of VWAP. Standing for volume weighted average price, VWAP provides the average price that a security has traded throughout the day, based on volume and price.
Many traders look to VWAP as a signal to buy or sell a security. The basic rule of thumb is that stocks under VWAP are shorts and those above VWAP are longs. While entire courses have been built on this idea, the simple reality is that VWAP is extremely unreliable.
Countless charts show the weakness of VWAP, but you only need to look at a few charts to see why VWAP is overhyped and overrated.
Here’s FSLY 1 minute chart, has a nice move down, but you can see how far away the turn is from VWAP…
BYND 1 minute chart, still not a short because it’s over VWAP?
Here’s SHOP 1 minute chart, has a nice move down, but still over VWAP therefore not a short?
OPGN 5 minute chart with VWAP. Is it a short or a long?
I can go on and on, but the point still stands: VWAP is not a great trading indicator. It can be incredibly misleading—especially when used by “day trading gurus” who advertise “guaranteed” ways to get rich while day trading. If you have taken a course by one of these gurus and have not seen as much success as you wanted by using VWAP, the problem likely isn’t you. Instead, the problem is that the method or strategy that you have been taught is simply based on a flawed premise.
Instead of looking to VWAP, I encourage my students to look at a metric that is much more reliable. Specifically, I am talking about moving averages. Moving averages—when used properly—can be one of the most effective indicators that day traders can use. I have leveraged moving averages myself to a high degree of success and I am certain that you can too.