Stocks & Commodities V. 26:9 (24-33): The MIDAS Touch, Part 1 by Andrew Coles, PhD

Stocks & Commodities V. 26:9 (24-33): The MIDAS Touch, Part 1 by Andrew Coles, PhD
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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 position trader.

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.

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