how is vwap used 
vwap is used in different ways by traders traders may use it as a trend confirmation tool and build trading rules around it for instance they may consider stocks with prices below vwap as undervalued and those with prices above it as overvalued if prices below vwap move above it traders may go long on the stock if prices above vwap move below it they may sell their positions or initiate short positions institutional buyers including mutual funds use vwap to help move into or out of stocks with as small of a market impact as possible therefore when they can institutions will try to buy below the vwap or sell above it this way their actions push the price back toward the average instead of away from it vwap s incorporation of volume is valuable to traders for what it can indicate about the degree of trading activity during short periods of time whether the competition is taking or exiting positions vwap vs simple moving averageon a chart vwap and a simple moving average sma may look similar however these two indicators are calculated differently and represent different results vwap is calculated by multiplying the typical price by volume and then dividing by total volume a simple moving average incorporates price but not volume the sma is calculated by totaling closing prices over a certain period say 10 days and then dividing the total by the number of periods e g 10 limitations of vwap1 vwap is a single day indicator and restarts at the opening of each new trading day attempting to create an average vwap over many days could distort it and result in an incorrect indicator 2 while some institutions may prefer to buy when the price of a security is below the vwap or sell when it is above vwap is not the only factor to consider in strong uptrends the price may continue to move higher for many days without dropping below the vwap at all or only occasionally therefore waiting for the price to fall below vwap could mean a missed opportunity if prices are rising quickly 3 vwap is based on historical values and does not inherently have predictive qualities or calculations vwap is anchored to the opening price range of the day therefore the indicator increases its lag as the day goes on this can be seen in the way a one minute period vwap calculation after 330 minutes the length of a typical trading session will often resemble a 390 minute moving average at the end of the trading day 