I thought to provide you with an article about the Volume-Weighted Average Price (VWAP) as this useful tool seem to gain some increased popularity in the retail world. However, some of the traders seem to not know about the standard deviation levels of the VWAP which most of the time I refer to as the Value Area. In case you are not familiar with the term Value Area, I would suggest you, to read the specific articles about understanding the value area and the various types of value areas which I posted some time ago.

Now then, there are three underlying parts about this subject. The first part would be to go over the basics of the tool which actually is the essence of this article. The second part would be to go over how we use various VWAP periods to filter through the markets to understand what is occurring from a bigger picture perspective. And the third part is about to discuss the MIDAS VWAP concept. That said; let's dig into the first part, the basics of VWAP.

The VWAP is potentially one of the most important tools that can be used in market analysis as well as trading. It gives you a clear sense of what the market’s current state is based on the periodicity in which you’re referencing. For example, we are able to easily determine whether the market is balanced or imbalanced. VWAP can be considered an indicator as well as a synthetic order type that can be used to place an order into the market. The calculation should be the same but the uses are somewhat different.

Here’s a basic calculation of VWAP:

Do we need to know how VWAP is calculated to conduct accurate technical market analysis? Not really but its good to know how this tool is built. The way we want to look at VWAP is consistent with the underlying concepts of Auction Market Theory (AMT). VWAP possesses all the same references as a TPO Value or Volume Value Area would provide. We have a developing point of control that being the VWAP and we have a value area which is the area between the first two standard deviation levels. And this is the key of this article, so just let us repeat this again: the value area of the VWAP is the area between the first two standard deviation levels which would be the negative first (-1) standard deviation level and the positive first (+1) standard deviation level.

Because a picture is worth a thousand words here is a diagram of a bell curve distribution in which you see the various standard deviations including the 0.5 levels. I’ll then compare that with a TPO distribution, a Volume profile distribution and lastly, a VWAP with the Standard Deviation levels.

Now that we can see how a normal distribution looks, let’s take a look at a standard/normal day TPO distribution representing those same elements:

A Volume Profile renders essentially the same message with a value area and a volume point of control:

And lastly, a VWAP exhibits the same AMT qualities in a smoothed and dynamic form:

Now that we’ve covered the basics, let’s talk about how we can use the VWAP for top-down technical analysis. First, remember the periodicity hierarchy? The same applies here with the VWAP periods. What I mean by that is we aren’t using yearly bars or quarterly bars to determine market structure, we’re using VWAP periods, in this case, to view what the market is telling us. Same order just slightly different way of going about it. However, that's something to talk about in the next post.