The most important indicator for a day trader
VWAP (Volume Weighted Average Price) – Why it is perhaps the most important indicator you can use as a day trader.
There are a myriad of indicators out there and an old motto I follow is “Analysis Paralysis” – don’t use too many indicators when trading. The risk is that you expose yourself to information overload and never come up with an entry and often premature exits.
However, there is a holy grail when it comes to which indicator I would never trade without and that is VWAP. What VWAP does is give you the volume-weighted average price of the current ongoing intraday trade. The VWAP should not be confused with a moving average that only aggregates X number of recent opening or closing prices (depending on the configuration). VWAP adds up the total traded order value of traded shares by the total number of shares traded. So you get the true average price.
VWAP is important from the perspective of institutional traders and market makers as they use VWAP as a gauge of when to distribute (sell) and accumulate (buy) positions to maximize profits.
As an institutional trader or market maker, you trade large positions that in some cases may require several hours or days to get in and out unless you want to leave a significant mark on the price. To make this happen in the best possible way, VWAP is used to help find the right modes of accumulation or distribution of these positions.
If an institutional trader handles a large order on behalf of a client, it also usually means a commission for the trader if, say, 500,000 shares of AAPL are purchased and the trader can accumulate below the VWAP instead of around or above.
The VWAP is an important scale where trading below the VWAP is considered bearish and above the VWAP is considered bullish. VWAP often acts as a point of resistance or support intraday if the scale is about to shift from bull to bear and vice versa. Imagine that the VWAP is like a tide where you hardly want to remain in a short position if the price suddenly breaks upwards through the VWAP and trades above. It is a strong indication that the power has shifted. Do not stand in the way.
VWAP can NOT be used as an indication that a stock is oversold or overbought. There is nothing to say that the price will return to the VWAP if it trades well above it. Rather, it is merely an indication of strong purchasing power. Vice versa for a stock that is heavily divested and far below.
VWAP is a pure intraday indicator that resets every trading day. There are clever variants of VWAP that link the volume-weighted average price over longer periods. But these are not as common.
See the attached pictures of graphs where VWAP is included and see how price respects VWAP as a support/resistance and situations where price went from one side to the other and really shifted the current.
The $DPW that I traded a week ago (see picture) closed the first 5 minutes below VWAP which gave me a second chance for entry instead of the Pre-market highs that was originally intended. Once the price chooses its side of the VWAP (and of course a lot of other factors as well), it usually stays there for the majority of the trading day.
Where is the volume?
Not all brokers report the volume, mainly because there is not really a central compilation. However, there is a way to solve this with the leading forex brokers such as Skilling, Pepperstone and IC Markets. They offer cTrader.
cTrader is one of the world’s leading platforms for forex and online trading, and the main competitor to MetaQuote’s popular MT4 and MT5 platforms. cTrader is the flagship product of the Cypriot financial technology company Spotware, which since its launch in 2010 has captured market share on a continuous basis and is now used by millions of traders worldwide.
cTrader is a trading platform specially developed for online trading of different types of financial instruments. Through cTrader, users can both invest and speculate on assets such as currencies, stocks, crypto assets, indices, commodities and other exchange-traded products. cTrader is not a broker per se, but instead provides the technology and systems through which brokers who lack a proprietary platform (or want to offer a third-party solution as a complement) can enable trading for their users.
The basic cTrader offering consists of over 70 built-in technical indicators free to use for analysis. On top of this, there are also plenty of additional tools to add, either by building them yourself or choosing from ready-made options. Volume is thus available as an indicator, through which WWAP is obtained.
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