Trend Bias Filter
If price is holding above VWAP, the trend is generally bullish for the session. Align your long ideas with this bias. Flat or short ideas should be considered below it.
VWAP Basics: The Fair Value Anchor
VWAP (Volume-Weighted Average Price) is the average price paid for a stock today, weighted by the amount traded at each price. Traders use it as a real-time “fair value” anchor: **above VWAP** suggests buyers are in control, **below VWAP** suggests sellers.
The Three Core Tells of VWAP
The Risk Line
VWAP provides a clear invalidation level. When entering a long near VWAP, your hard stop should be a clean loss of the line. No averaging down past this point.
Entry Context
Breakouts that occur **with high RVOL** and hold above VWAP have higher odds of trending. VWAP separates high-probability continuations from mean-reversion chop.
“VWAP shows where most money changed hands today. If price is above it and volume is strong, the crowd is paying up, confirming a trend.”
Anchored VWAP (AVWAP) and Multi-Timeframe Context
While standard VWAP resets each day, **Anchored VWAP (AVWAP)** starts the calculation from a specific, significant event. This allows you to track the average cost basis of traders since a major catalyst or pivot point.
How to Use AVWAP in Practice
- Anchor on the Catalyst: Start AVWAP at the first candle of a pre-market news event or halt resumption. If the price holds above this AVWAP, the rally remains fundamentally supported by traders since that event.
- The Pinch: When the daily VWAP and a key AVWAP (e.g., from the catalyst low) converge, expect a decisive move. A reclaim through this 'pinch' on volume is a high-conviction trigger.
- Risk Management: For trades related to a specific catalyst, AVWAP is often a more relevant risk line than the daily VWAP alone.
Volume Fundamentals & RVOL Validation
VWAP is the map, but **Volume is the fuel**. Without participation, price moves are unreliable. We use Relative Volume (RVOL) to determine how engaged the market is compared to its average behavior.
Volume Metrics Explained
- ADV (Average Daily Volume): The typical baseline daily share volume.
- RVOL (Relative Volume): Current volume versus the average volume for the stock at this specific time of day. RVOL ≥ 2x (two times or more) suggests the crowd is highly engaged.
- Volume Distribution: Volume is thickest at the open and close; midday is typically low RVOL/chop.
| Signal | VWAP Context | Action |
|---|---|---|
| RVOL ≥ 2x early | Price holding VWAP | Focus list; look for long triggers at VWAP/levels. |
| Breakout on RVOL ≤ 1x (RVOL is less than one time) | Price far from VWAP | **Avoid.** Likely low conviction and prone to fading. |
| Pullback on declining volume | Price dips toward VWAP | Healthy consolidation; look for a higher low entry near the line. |
| Heavy volume slam back | Price loses VWAP after reclaim | **Exit.** The risk line failed with strong supply confirmation. |
The Golden Rule: No RVOL, no trade. Volume is your definitive confirmation that a move, even around VWAP, has genuine support.
Playbook — The Four VWAP Setups
These are the four high-probability, repeatable scenarios involving VWAP and volume. Each requires a clean VWAP line (not a sloppy, flat one) and strong RVOL.
VWAP Reclaim (Long)
Context:
Strong momentum name dips below VWAP briefly.
Trigger:
Clean reclaim + hold above VWAP with rising RVOL.
Risk:
Hard stop immediately on VWAP loss.
Target:
Intraday resistance / HOD.
VWAP Hold + HOD Break
Context:
Price consolidates tightly right above VWAP.
Trigger:
HOD break on accelerating RVOL.
Risk:
Back under HOD level or VWAP loss.
Target:
Next whole/half dollar; 1:2 R/R minimum.
Pullback to VWAP (Continuation)
Context:
First clean pullback to VWAP after expansion.
Trigger:
Higher low candle near VWAP with supportive tape.
Risk:
Tight stop under the pivot low or VWAP.
Target:
Retest HOD; partials at round levels.
VWAP Fade / Loss (Short)
Context:
Failed reclaim attempt; dilution risk present.
Trigger:
Rejection wick + clean VWAP loss on rising sell volume.
Risk:
Above the reject wick or VWAP reclaim.
Target:
Prior support / VLP (Volume Profile Lows).
Execution & Liquidity Management
A perfect setup means nothing without sharp execution. In fast-moving names, small errors in order placement can ruin R/R. **Discipline is the key to profit-taking**.
Trade Management Checklist
Order Types
Use **Limit Orders** around key VWAP and support/resistance levels. Avoid Market Orders on volatile stocks to prevent catastrophic slippage.
Tape Confidence
Trade confidently on **tight spreads** and quick fills. When spreads widen, reduce size or skip the trade due to increased slippage risk.
Profit Scaling
Take **partials (trims)** into strength at every whole/half dollar or prior high. This protects capital and allows you to trail the rest risk-free.
Risk Line Discipline: If price crosses and holds past your defined VWAP/level risk line, **you are out**. Averaging down on a failed thesis turns small losses into blow-ups.
Mini Lab — Read the Charts
Analyze these two common chart patterns. (Replace placeholders with your chart images.)
Price finds buyers on volume, cleanly reclaims VWAP, and treats the line as dynamic support for the entire session. *Action:* Long entries on pullbacks to the line.
Price continually crosses VWAP; RVOL is muted. This is a day for small-size fades away from VWAP or to avoid trading altogether. *Action:* Avoid breakouts.
Pair this lab with your VWAP & Volume Cheat Sheet for step-by-step walkthroughs.
