Understand VWAP and ADX

Posted by aarav badhe on November 9th, 2020

It is known that the volume-weighted average price is a flexible method commonly used by technical traders in seeking good investment equities. It is used by portfolio managers of mutual funds when they have to buy a substantial amount of a specific stock. Similarly, VWAP is used by retail traders to find a stock's future potential, and intraday traders to evaluate the mean price on the market so that when the price is below VWAP, they can purchase a stock.

It is a weighted average formula that analysts and traders alike often use to assess the demand for stock in terms of both volume and price. For calculation reason, it takes into consideration all the orders from the day and calculates the mean value. It can be distributed over a single time frame or multiple requirements-based frames.

VWAP has different applications, but analysts and portfolio managers primarily use it to remove noise generated by price fluctuations during the day and to assess a fair price for buying or selling stocks. This provides traders with an indication of how the stock was trading during the day.

How to interpret a vwap indicator

VWAP provides traders with a critical indicator of a stock's price change, which helps them locate the particular point in a time frame where the momentum lies. Let's take an example of this; a trader might be dealing with a stock that has many times struggled to break out above the VWAP line due to constant selling pressure. So, he may want to know the exact point when the stock breaks over the VWAP indicator line successfully, or else, if he enters a short position, he may end up being on the wrong side of market momentum.

Stocks are deemed 'cheap' or 'of value' below the VWAP line and tell traders to enter a short position. In contrast, stock prices are tagged 'expensive' above the VWAP line.

ADX: How to interpret the trend strength indicator 

Trading in a trend's path reduces risk. The prerequisite of fair trade is to recognise a clear trend in the market. It is a skill every trader ought to have. But how do we decide whether this pattern is high or weak? It is worth following a strong trend as it increases profit chances, but if the trend is weak, it would also lead to potential losses.

The ultimate trend predictor that lets you determine whether a trend is worth tracking is the ADX.

The average directional index, minus directional index (-DI) and directional index (+ DI) form a cluster of indicators that enable you to deduce a trend's direction and power.