VWAP
Session VWAP (Volume Weighted Average Price)
The Volume Weighted Average Price (VWAP) is a key indicator that shows the average price at which a security has traded, weighted by volume. It provides a clear view of the true average price traders have paid over a specific period, making it an essential tool for understanding market sentiment. The Session VWAP calculates the VWAP for different periods such as daily sessions, weekly, monthly, or even yearly timeframes.
How It Works
Anchor Period: The tool allows you to set the anchor period for calculating the VWAP. You can choose between:
Session: Calculates VWAP for each trading session (usually a day).
Week: Calculates VWAP for each week.
Month: Calculates VWAP for each month.
Year: Calculates VWAP for each year.
VWAP Calculation:
The VWAP is calculated by taking the sum of the price multiplied by the volume, divided by the total volume for the chosen period.
The formula ensures that the VWAP gives more weight to prices with higher trading volumes, providing a more accurate reflection of the market's average price based on how much volume has occurred at each price level.
Rolling VWAP: The tool continuously updates the VWAP as new data (price and volume) comes in, ensuring that the VWAP reflects the most recent market activity.
Visual Representation: The VWAP is plotted on your chart as a line, making it easy to see the average price traders are paying during the selected period. A label is placed on the right side of the VWAP line, and the line extends to show how VWAP has changed over time.
Why It Matters
Market Sentiment: The VWAP helps you understand whether the market is trading above or below the average price. If the current price is above the VWAP, it indicates that buyers are in control, while a price below the VWAP suggests that sellers are dominating.
Institutional Benchmark: Many institutional traders use the VWAP as a benchmark for their trades. If they can buy below the VWAP or sell above it, they are considered to be getting a good price compared to the average.
Trade Entries and Exits: Traders often use VWAP to time their entries and exits. For example, if the price drops below the VWAP, it might be a signal to buy, anticipating that the price will return to or rise above the VWAP. Similarly, if the price rises far above the VWAP, it could be a good time to sell.
Risk Management: The VWAP helps set realistic price expectations. You can use it to place stop losses or take profit levels based on where the VWAP is relative to your entry price, reducing the chances of getting caught in unfavorable trades.
In summary, the Session VWAP offers a simple yet powerful way to track the market's average price over different periods, helping you make better-informed trading decisions by understanding where the majority of trading activity has occurred.
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