VWAP stands for volume-weighted average price. It is the average price of every contract traded so far in the session, where each price counts in proportion to the volume traded at it. A price where ten thousand contracts changed hands moves the line far more than a price where ten did.
Because it starts fresh at the open of each session, VWAP is a running summary of where the day's business has been done. Traders read price above the line as trading above the session's average, and price below it as trading below. It describes the past; it does not predict the next bar.
01.1How VWAP is calculated
Most charting platforms use the typical price of each bar, the average of its high, low and close. Multiply that typical price by the bar's volume, add the result to a running total, and divide by the running total of volume. Repeat on every bar until the session ends, then start again at zero.
Because the denominator keeps growing, each new bar moves the line less as the day goes on. Early in the session VWAP can swing widely; by the afternoon it is heavy and slow.
typical = (high + low + close) / 3
cumPV += typical * volume
cumVol += volume
VWAP = cumPV / cumVol // reset both sums at session open01.2How to use the VWAP indicator on a chart
In NinjaTrader 8, TradingView and most platforms VWAP is added like any other indicator. The setting that matters most is the session it resets on. Futures trade nearly around the clock, so a VWAP that resets at the 6:00 p.m. ET Globex open will look different from one that resets at the 9:30 a.m. ET cash open. Decide which session you mean before you compare charts.
Many versions also draw bands at a set number of standard deviations above and below the line. The bands show how far price has stretched from the session average; they are a measure of distance, not a target.
01.3A VWAP pullback rule, written mechanically
A common rule family waits for price to trade above VWAP, pull back to touch it, and then enter in the direction of the earlier move, often with a second filter such as a MACD trend reading. Written as code, the rule needs exact answers: how close is a touch, which bar's close confirms it, where the stop sits, and what time window allows a trade.
We have tested rules of this family in backtest and simulation. They behaved very differently from one market period to the next, which is why this site explains the mechanics and the questions to ask, and shows no results.
01.4Anchored VWAP
Anchored VWAP uses the same formula but starts the running sums at a bar you choose instead of the session open: a big news bar, a swing low, the first day of a contract month. It answers a different question: what is the average price paid by everyone who traded since that event?
Because the anchor is a choice, two traders can draw two different anchored VWAPs on the same chart. A rule that uses one must state exactly how the anchor bar is picked, or it cannot be backtested honestly.
Where it usually goes wrong
- Comparing two VWAPs that reset on different sessions and calling the difference a signal.
- Treating the standard deviation bands as price targets.
- Choosing an anchored VWAP start point after seeing the chart, which builds hindsight into the test.