The MIDAS Touch, Part 1 by Andrew Coles, PhD
The volume-weighted average price can be applied to
daytrading and short-term swing trading. Here’s how.
IN a Technical Analysis of STOCKS & COMMODITIES
article published in May 2001, George
Reyna drew attention to how a certain type of
volume-weighted average price (VWAP) calculation
can be a powerful predictor of support and resistance associated with major reversals off the daily
charts. This is a technique that would be of interest to the
The ingenuity behind this unique application of the VWAP
principle can only be appreciated in the context of standard
VWAP calculations, which have been extensively applied in
the trading industry for many years. A standard VWAP calculation
represents the total value of shares traded in a particular
stock on a given day divided by the total volume of shares
traded in that stock on that same day. This standard calculation
is thus a method of pricing transactions and is typically
used as a benchmark to measure the efficiency of institutional
trading or the performance of traders themselves.
As an example, in the mutual and pension funds industry
it is used as a trading benchmark: the point of using a VWAP
trading target is to ensure that the trader executing the order does so in line with the market volume. This way, transaction
costs are reduced by minimizing market impact.