Whilst the full application of VWAP and it’s standard deviations is a wide topic, here I will discuss the basic VWAP itself, and how it has been useful in the recent crude oil bull market.
The VWAP is not included in all charting applications. I use Sierra chart, and it can be found as one of the chart studies. In this example I have set the VWAP to monthly, which will calculate it according to the calendar month, resetting at the beginning of each month. The two screen shots below, illustrate where it can be found on the Sierra Chart package.
Once VWAP is setup, it plots in a similar way to a moving average, on the chart. Below is a siple chart of WTI Crude Oil (CLM8 – NYMEX) in the month of April 2018. It has been a very bullish two weeks, which is where the VWAP is most effective. As can be seen the market has bounced of the VWAP very accurately since early April. at present we are just hovering above the VWAP, which is providing excellent support for long trades.
This is a ‘perfect-fit’ example, and most situations will not be like this. It is common to see the markets oscillate above and below VWAP, occasionally using it as support and resistance. The reason it was worked well here, is crude oil has been bullish for many months. If a market is firmly established in a trend, then as it approaches it will usually act as good support (bullish market), or resistance (bearish market). It can be seen from the above chart that very low risk/high potential reward trades can be made, by buying crude oil when it reaches VWAP.