Understanding VWAP Cross
A VWAP cross is a trading indicator that becomes relevant when a security’s price intersects the Volume-Weighted Average Price (VWAP).
The Mechanics of a VWAP Cross
Traders proficiently use both the current price of the security and its VWAP to determine a VWAP cross. The VWAP encapsulates how the volume affects the traded price, steadily updating throughout the trading day.
VWAP Cross Charting
Technical analysis systems can be programmed to illustrate a security’s other metrics as well as its VWAP. This is typically done using candlestick patterns and drawing trendlines on a technical chart. When the security’s price crosses the VWAP trendline on the chart, it signals a VWAP cross.
In these patterns, VWAP trendlines complement support and resistance trendlines. A single VWAP trendline is usually plotted on a candlestick chart, heavily focusing on its movement relative to the security’s price.
The VWAP Calculation
Understanding the VWAP is paramount for employing the trendline effectively.
VWAP = \frac{ \text{Security Shares Bought} \times \text{Security Share Price} }{ \text{Security Shares Bought} }
VWAP provides a graphical depiction of the effects of trading volume on a security’s price. Incorporating varying volume indexes, like the Positive Volume Index or the Negative Volume Index, can give additional insights.
Signal Indicators from a VWAP Cross
VWAP, influenced by volume and price, offers various scenarios for traders. This dual nature makes VWAP a valuable inclusion on candlestick charts. Depending on the security’s candlestick pattern, VWAP may trend above or below.
Interpretation of these variables often drives buy and sell signals. Daggers of unique volume changes sharply impacting price—visible in the VWAP trendline—captivate traders. For instance, a security trending below its support clicks with rapid volume and price surge, making VWAP skyrocket above, which perhaps frames a bullish buy signal.
Conversely, when VWAP has been sustained at high arrays then suddenly descends, translating into a bearish sell signal, it suggests the security is forecasted to tumble. Employing the VWAP cross can help a technical analyst spot innovative price patterns not factored in the security’s current valuation.
Related Terms: volume-weighted average price, candlestick, volume, resistance level, support level, bullish signal, bearish signal.
