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If you have read any of my articles you are aware of my complete disdain for lagging indicators. The inclusion and use of the Volume Weighted Average Price (VWAP) on my chart would seem to be a contradiction (a hypocritical one at that) in my trading style. To that I answer “guilty.” This is a timely indicator to keep track of intraday movement and your specific positioning relative to the daily range. There are those that use the VWAP to enter trades; I don’t find it useful in that respect, but there are many other uses for this valuable indicator.

I have observed traders, and many trading room operators, initiate trades in the direction of the price movement as it moves through the Volume Weighted Average Price line. I’ve never traded it in this fashion as it is not a primary indicator for initiating a trade in my world. That being said, I have observed numerous traders, with some success, execute trades at the VWAP. Since I don’t trade this indicator in that fashion, I can’t give you hard data to support this particular trading strategy. I performed an unscientific and quick back-test (a perfunctory one, at that) that shows this strategy is moderately successful; not a “cure-all” for entering trades, not by a long shot.

Of what use is this indicator?

As I stated from the onset, there are many useful and some less than useful techniques for employing the Volume Weighted Average Price. For me, I use the indicator to establish a trade direction bias and to keep track of the market price relative to its high – low position throughout the course of the day. In a day that is rife with significant swings to the upside and significant swings to the downside it can become difficult to orient yourself as to your position on the futures chart; you want something that reflects a neutral position. Obviously, this particular indicator works quite a bit better than moving average but that still doesn’t keep it from lagging; so for me, it is a satisfactory trade-off to establish a normative value for the sum combining both volume and price movement. It’s sort of like having a GPS in a very large forest; at least you know where you started the day and can easily return to that spot. Traders seem to lose track of their positioning on a given day and it makes it difficult to establish trend or bracketing parameters.

The VWAP is a standard indicator on many trading platforms and the Internet is loaded with “do-it-yourself” instructions for programming the indicator into the platform API. I have only touched on a few of the uses of this indicator and further investigation by a curious trader will turn up a plethora of useful applications for the Volume Weighted Average Price.

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Source by David S. Adams