Stock trading indicators are used by many stock traders, from beginner to advanced. However, many traders do not understand the concept of a stock trading indicator and how it affects their trading results.
Let’s start with the basic definition of a stock trading indicator.
A stock trading indicator is any type of analysis that helps you make better decisions about your trades. To be more specific, an indicator is any quantitative measure at a time that provides information about the current state of the economy, an industry, a company, a security or a commodity.
When it comes to trading the stock market, the online world is full of tips: charts, indicators and strategies. Everyone thinks they can predict prices. While some strategies are sound, others are comprehensive.
This list sifts through the fluff and provides you with real indicators and strategies that you can use to make smart decisions about your next trade.
Table of Contents:
VOLUME-WEIGHTED AVERAGE PRICE (VWAP)
To find VWAP values you need to add “the dollars traded for each transaction (price multiplied by the number of shares traded) and then divide by the total shares traded for the day”.
It’s important to remember that VWAP is a measure of the average price investors are paying over the course of a trading session, not a measure of value, per se.
WHAT IS VWAP?
The volume-weighted average price (VWAP) is an intraday calculation used to compare where a security is currently trading against its volume-weighted average for the same day.
It is a technical indicator that can be used as a trading strategy for active traders. However, it is also used by larger funds to assess the price trend of their investments.
It is important to note that this indicator will be calculated on a daily basis. Each new trading session resets the formula. However, there are other “multi-day” vwap indicators.
VWAP STRATEGY
When choosing a trading strategy, it is important to consider many different factors when deciding how to trade a stock. VWAP (volume-weighted average price) strategies are some of the most popular strategies used by traders today.
To understand VWAP it is better to have a good understanding of its components:
Volume – this represents the number of shares that have been traded in the stock in a given period of time. This can be measured based on the total volume for the day or for a certain period of time you want to measure.
Weighted average price – this represents all transactions during a period and calculates the average price at which those transactions took place. It does not take into account any open or pending orders.
Price – this is simply the price of the security based on the last trade that took place on the market. The price is usually what you’ll see on a quote screen, but since it only takes into account the last trade, it could potentially be very misleading as to where the price is currently trading in relation to other trades that may have taken place earlier in the same time period.
VWAP TRADE
For traders, VWAP can be used as an important benchmark to assess whether the price of a security is trading above or below fair value based on current volume levels.
For example, if you’re looking at a stock you have an interest in, and it’s currently trading below its VWAP, you might want to consider buying that stock as it’s been trading at lower prices all day so far.
As a result, you may be able to take advantage of more favorable prices than you would get if you bought at the current market price. If this is your strategy, you believe that the uptrend will continue eventually.
Conversely, if you are a momentum trader, VWAP can tell you who has the upper hand: bulls or bears. To that end, you might consider going down when prices are below vwap, or long when they are above.
VWAP BOULEVARD
VWAP Boulevard is an indicator that uses the actual volume traded over a certain period of time (VWAP) to display where the original average price of institutional buyers or sellers is.
Essentially, you identify the level of intraday vwaps for the previous days of higher volume (or significant intraday candlesticks) that the stock ran. Draw your line there, then wait for the current pre-market or intraday action to catch up and react at that level.
When the price is below the VWAP line, it suggests that the market is in a bearish trend.
If the price is higher than the VWAP line, it suggests that the market is in an uptrend.
The VWAP Boulevard indicator is designed to help traders stay on the right side of the market.
