What Is VWAP? Volume Weighted Average Price Explained

For each candle, multiply the typical price (high + low + close, divided by three) by that candle's volume. Keep a running total of those values and a running total of volume, then divide one by the other.

The key property is that VWAP resets. Standard VWAP resets at the start of each trading session, so it always describes today, not the last 20 days. This is what separates it from a moving average, which drags history forward indefinitely.

Price above VWAP means the average buyer today is in profit and control sits with buyers. Price below means the reverse. Traders use it as a session bias filter: long setups only while price holds above VWAP, short setups only below.

The line is also used as a mean-reversion target. When price extends far from VWAP without a clear catalyst, intraday participants who are offside start to lean against the move, and price frequently rotates back toward the line. This is a tendency, not a rule — in a strong trend day, price can hold one side of VWAP from open to close.

Standard deviation bands drawn around VWAP mark how far price has stretched relative to the session's own volatility. The first band is often used as a target and the second as an exhaustion zone.

Anchored VWAP is the more powerful variant: instead of resetting at the session open, you anchor it to a specific event — an earnings release, a swing high, the start of a rally. The resulting line shows the average entry price of everyone who has traded since that event, which is why it so often acts as support or resistance on retests.

VWAP is most useful as an objective bias filter. Deciding at the session open that you will only take trades on one side of the line removes a large share of impulsive counter-trend entries — which are the trades that most often trigger a daily loss limit.

It also provides clean invalidation. If you are long above VWAP because buyers are in control, a decisive close below it says the premise is gone. That is a defined, non-negotiable exit, which is exactly what a drawdown rule requires.