VWAP Trading

Volume Weighted Average Price, or VWAP, is the most important technical indicator in day trading. Definitions of VWAP can be found in both Wikipedia and many other online resources. I will skip explaining it in detail for the sake of keeping this guide short, but essentially, VWAP is a moving average that takes into account the volumes of the stock being traded. Other moving averages are calculated based only on the price of the stock in the chart, but VWAP also considers the number of the shares that the stock is traded on every price. Your trading platform probably has VWAP built into it and you can use it without changing its default setting.
VWAP is a good indicator of who is in control of the price action - buyers or sellers. When stock is traded above VWAP, it means that the buyers are in overall control of the price. When a stock price breaks below the VWAP, it is safe to assume that the sellers are gaining control over the price action.
Trading based on VWAP can be very easy for beginner traders because so many traders are studying the VWAP and making decisions based on it. Therefore, a beginner trader can easily be on the right side of the trade. When a stock tries to break the VWAP but cannot, you can short stock because you can safely assume that other traders that are watching will also begin to short. A trading strategy based on VWAP is a simple and easy strategy to follow. I usually short stocks when traders try but fail to break the VWAP in 5-minute charts.
Let's take a look at a recent trade that I took on SolarCity Corporation (SCTY) on June 24, 2016.

Example of a long VWAP Strategy on SCTY.
At around 10:30 a.m. on June 24, 2016, I noticed that SCTY had found a support over VWAP. I purchased 1,000 shares of the stock with the anticipation of moving toward $22 with VWAP as a support. My stop was a close below VWAP. I first sold a half-size position at $22.50, and then moved my stop to break-even. I sold another position at $22 because I know half-dollars (such as $1.50, $2.50, $3.50) and whole dollars ($1, $2, $3) usually act at a support or resistance level.
VWAP also works well when you want to short stocks. Let's take a look at another recent trade that I took on SolarCity Corporation, this time on June 22, 2016, and this time on the short side.

Example of a short VWAP Strategy on SCTY.
At around 11 a.m., I noticed that SCTY had faced a resistance over VWAP. I shorted the stock with the anticipation of losing the VWAP at around $23. Around 12 pm buyers gave up and the sellers took control of the price action. I had a nice run down to $22 and covered my shorts at $22 for a good $1,000 profit.
To summarize my trading strategy for VWAP trading:
  1. When I make my watch list for the day, I monitor the price action around VWAP. If a stock shows respect toward VWAP, then I wait until a confirmation of the VWAP break or support.
  2. I usually buy as close as possible to minimize my risk. My stop will be a break and close 5-minute chart below VWAP.
  3. I keep the trade until I hit my profit target or until I reach a new support or resistance level.
  4. I usually sell half-positions near the profit target or support or resistance level and move my stop up to my entry point or break-even.
A similar approach will work equally as well when you short a stock.