Module 6B: Indicators · Lesson 6 of 10 · Back to course
Most indicators in this module are built only from price. VWAP is different: it brings in volume – how much was traded – and asks a simple question: what’s the average price people have actually paid today, giving more weight to the busy moments? It’s widely watched by intraday traders on shares and index futures. It’s also easy to misuse, especially in forex.
What it is
VWAP stands for Volume-Weighted Average Price. It’s an overlay line drawn on an intraday chart. Unlike a moving average, it doesn’t look back a fixed number of candles. It usually starts fresh at the beginning of each trading session and builds up through the day.
- Price above VWAP: on average, today’s buyers have paid less than the current price.
- Price below VWAP: on average, today’s buyers have paid more than the current price.
Large institutions sometimes use VWAP as a benchmark – for example, judging whether a big order was filled at a better or worse price than the day’s average. That’s one reason intraday traders pay attention to it.
How it’s calculated (in plain English)
- For each candle, work out a typical price: (high + low + close) ÷ 3.
- Multiply the typical price by that candle’s volume.
- Keep a running total of (typical price × volume) since the session started.
- Keep a running total of volume since the session started.
- VWAP = running total of (price × volume) ÷ running total of volume.
Because it’s cumulative, VWAP moves a lot early in the session and becomes steadier as the day goes on – by late afternoon, one new candle barely shifts it.
The volume problem in forex and CFDs
VWAP needs reliable volume. On exchange-traded shares and futures, volume is the real number of shares or contracts traded. Spot forex has no central exchange, so there’s no single true volume figure. Forex and many CFD charts show tick volume – the number of price changes – from your provider’s own feed. Tick volume often moves in a similar pattern to real activity, but it isn’t the same thing, and VWAP built from it can differ between providers.
Also check when your platform resets VWAP. For the FTSE 100 cash index, a reset at the 8am UK open makes sense. For a 24-hour CFD or a currency pair, the platform might reset at midnight in another time zone, which can make the line less meaningful for a UK session trader.
How traders use it
1. Intraday bias. Some traders only look for buys while price is above VWAP and only for sells while it’s below. It’s a filter, similar in spirit to using a moving average for trend direction.
2. A reference level. Pullbacks to VWAP during a trending day are a common reference point. Sometimes price reacts there; often it goes straight through.
3. Judging your own fills. If you’re trading shares, comparing your entry price with VWAP shows whether you bought at a better or worse price than the day’s average.
4. Context for opening-range trades. Some index traders combine VWAP with the first 15–30 minutes of the session – see the Opening Range Breakout Strategy. Others look at VWAP around the London open alongside the London Breakout Strategy.
Anchored VWAP is a variation that starts the calculation from a point you choose (for example a major high or a news event) rather than the session open. It’s subjective – where you anchor changes everything – so treat it with care.
Common mistakes
- Using VWAP on daily or weekly charts. Standard VWAP is an intraday, session-based tool.
- Assuming forex VWAP is as reliable as share VWAP. It’s built on tick volume from one provider.
- Not checking the reset time. A VWAP that resets at midnight New York time behaves differently from one that resets at the London open.
- Treating VWAP as a wall. Price crosses it often, especially in choppy sessions.
- Over-reading the first hour. Early in the session VWAP is based on very little data and moves a lot.
Example (illustrative numbers)
All figures are made up for teaching purposes. They aren’t real prices or a trade idea.
The first three 5-minute candles of a share’s trading session (prices in pence):
| Candle | High | Low | Close | Typical price | Volume | Price × volume |
|---|---|---|---|---|---|---|
| 1 | 101 | 99 | 100 | 100 | 500 | 50,000 |
| 2 | 103 | 101 | 102 | 102 | 300 | 30,600 |
| 3 | 102 | 100 | 101 | 101 | 200 | 20,200 |
| Totals | 1,000 | 100,800 |
VWAP after candle 3 = 100,800 ÷ 1,000 = 100.8p.
A simple (unweighted) average of the three typical prices would be 101p. VWAP is lower because the busiest candle (500 shares) traded around 100p. If the share is now at 101.5p, it’s trading above VWAP – today’s average buyer is slightly in profit. That’s context. It doesn’t tell you whether the price will rise or fall from here.
The prop firm angle
Many prop firm challenges are traded on CFDs or futures. Points to remember:
- On futures-based challenges, volume is real exchange volume, so VWAP is built on solid data.
- On forex/CFD challenges, VWAP uses the platform’s tick volume – fine as a rough guide, but don’t treat it as precise.
- VWAP is an intraday tool, so it suits intraday plans. If your plan holds trades for days, it adds little.
- As with every indicator, use it as a filter or reference, and keep risk fixed. A VWAP “bounce” is never a reason to risk more than your plan allows near a daily loss limit.
Key takeaways
- VWAP = cumulative (typical price × volume) ÷ cumulative volume, usually reset each session.
- Price above VWAP: today’s average buyer is in profit. Below: in loss.
- It’s most meaningful where volume is real (shares, futures). Forex uses tick volume.
- Check when your platform resets it, and use it on intraday charts only.
Quick quiz
- What’s the typical price of a candle with high 50, low 46 and close 48? (48 – (50 + 46 + 48) ÷ 3.)
- Why does VWAP move less in the afternoon than in the first hour? (It’s cumulative, so each new candle is a smaller share of the total.)
- Why is VWAP less reliable for spot forex? (There’s no central exchange volume, so it uses tick volume from a single provider.)
- Two candles: typical price 10 with volume 100, typical price 20 with volume 300. What is VWAP? ((1,000 + 6,000) ÷ 400 = 17.5.)
- Is standard VWAP designed for daily charts? (No – it’s an intraday, session-based tool.)
Key terms
VWAP · Volume · Tick volume · Typical price · Anchored VWAP · Trading session · Also see Trading jargon in plain English.
Try this
On a demo chart of the FTSE 100 or a large UK share (5-minute timeframe), add VWAP and check in the settings when it resets. For five sessions, note at 10am and 3pm UK time whether price is above or below VWAP, and how many times price crossed VWAP during the day. That gives you a feel for how often it acts as a “level” – and how often it doesn’t.
FAQ
Is VWAP good for day trading? It’s widely used by intraday traders as a bias filter and reference level. Its usefulness depends on the quality of the volume data and on your tested plan.
Does VWAP work in forex? It can be plotted, but it relies on tick volume from your provider rather than true market volume, so treat it as approximate.
What’s the difference between VWAP and a moving average? A moving average looks back a fixed number of candles and ignores volume. VWAP is volume-weighted and usually starts again each session.
Disclaimer: This page is general education, not financial or investment advice or a personal recommendation, and it doesn’t take your circumstances into account. Examples are hypothetical, for illustration only, and not an invitation to buy or sell. Learning a strategy doesn’t guarantee profits. Past performance is not a reliable guide to future results. Futures, spread bets and CFDs are complex and carry a high risk of losing money quickly because of leverage, and most retail traders lose money. With a real futures account, losses can exceed your deposit. Only trade with money you can afford to lose, and speak to an independent FCA-authorised adviser if you’re unsure. Read our full risk warning.