VWAP explained: the volume weighted average price, and how to use it

What VWAP measures

For each bar, take its typical price — the high, low and close added together and divided by three — and multiply it by the bar's volume. Add those up over the window, then divide by the total volume in the window. The answer is the average price at which the window's volume traded, as far as bars can tell you.

The weighting is the whole point. A plain moving average gives a quiet bar and a heavy one the same say; VWAP lets the heavy one pull the line towards its price. So where price sits relative to VWAP says something a moving average cannot: whether the current price is above or below where most of the recent trading took place.

VWAP settings: a rolling window

The one setting is the period: how many bars the average covers, thirty by default. It is bars of the timeframe the condition reads, so VWAP(30) on the 5-minute chart covers two and a half hours and on the daily chart six weeks.

This is the difference worth knowing before you use it. SixOne8's VWAP rolls forward bar by bar; it does not reset at the start of each session. Most charting tools anchor VWAP to the session open, so their line starts afresh every morning and covers a different number of bars at 10:00 than at 15:00. Here every reading covers the same number of bars, which keeps one condition meaning the same thing all day and on every timeframe. If you want something close to a whole session, a regular US session is 78 five-minute bars — but it is still a rolling window, so at the open it reaches back into the previous day rather than starting from nothing.

Volume indicators apply only to markets that carry volume. A strategy that uses VWAP will not apply to a forex or crypto market, and a bar that arrives without its volume gives no reading rather than being counted as zero.

How to use VWAP in a strategy

These are the comparisons SixOne8 offers for VWAP, in the builder's own words. Price — the bar's close — is always the subject.

1. Price above / price below. True for every bar that closes on that side of VWAP. A state, so an alert fires when the strategy first becomes satisfied and not again while it stays there.
2. Price crosses above / price crosses below. True only on the bar whose close moves through VWAP, compared with the bar before. A moment rather than a state — the usual choice for the condition that should trigger the strategy.

5m  ·  price crosses above  ·  VWAP(78)

Read it as a sentence: on the 5-minute chart, the close has just moved above the volume-weighted average of the last 78 bars. That is what the scanner evaluates at each 5-minute close, and what the alert will say if it is the condition that completed the strategy.

VWAP as context, not just a trigger

Traders read VWAP two opposite ways. Some treat price above it as the stronger side, and only look for longs there; others treat a stretch far from it as something likely to come back. Both are claims about what happens next, and neither is built into the line — it is simply the volume-weighted average, and your condition compares the close with it.

Used as context, a "price above VWAP" state pairs naturally with a faster trigger such as an RSI crossing or a relative volume spike: the VWAP condition decides which side counts, the other decides the moment. Because the window rolls, VWAP on a higher timeframe — the hourly or the daily — gives the slower picture without any session boundary in it.