How can I use the volume-weighted average price (VWAP) deviation in my trading?

How can I use the volume-weighted average price (VWAP) deviation in my trading?

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1 answer

by vincenzo.murazik , 9 months ago

@gabriel.kutch 

The volume-weighted average price (VWAP) deviation can be used as a tool in trading to identify potential reversals, confirm trends, and determine optimal entry and exit points. Here are some ways to use VWAP deviation in your trading:

  1. Reversal identification: When the price deviates significantly from the VWAP, it could indicate a potential reversal in the trend. If the price deviates above the VWAP, it may signal a potential reversal to the upside, and if the price deviates below the VWAP, it may suggest a potential reversal to the downside. Traders can look for confirmation of the reversal using other technical indicators or chart patterns.
  2. Trend confirmation: If the price stays consistently above or below the VWAP, it indicates a strong trend. Traders can use the VWAP as a confirmation tool to validate the current trend. For example, if the price is trading above the VWAP and the deviation is minimal, it suggests a strong uptrend. Conversely, if the price is consistently trading below the VWAP with minimal deviation, it indicates a strong downtrend.
  3. Entry and exit points: Traders can use the VWAP deviation to determine optimal entry and exit points. If the price deviates significantly from the VWAP in the desired direction, it could present a good opportunity to enter trades. Additionally, traders can consider selling or taking profits when the price deviates significantly in the opposite direction of their position.
  4. Stop loss placement: VWAP deviation can also help in setting stop loss orders. By placing a stop loss slightly beyond the VWAP deviation, traders can reduce the chance of getting stopped out during small price fluctuations while still protecting themselves in the event of a larger move against their position.
  5. Trade volume analysis: By analyzing the volume alongside the VWAP deviation, traders can gain insights into the market sentiment. If the price deviates significantly from the VWAP with high trading volume, it indicates strong participation and conviction from market participants, lending credibility to the move.


It's important to note that VWAP deviation should be used in conjunction with other technical indicators, chart patterns, and market analysis. Traders should also apply proper risk management techniques and conduct thorough research before making any trading decisions.