VWAP — volume-weighted average price — is the average price an asset traded at over a period, weighted by how much volume traded at each price. “VWAP strategy” means two different things depending on who’s saying it.
VWAP as an execution benchmark
Institutions use VWAP to judge execution quality. If you bought 1,000 units over the day and your average price was below the day’s VWAP, you executed well relative to the market. A VWAP execution algorithm slices a large order to track the volume profile — trading more when the market is busy, less when it’s quiet — so the fill lands near VWAP.
This is the original and more rigorous use.
VWAP as a trading signal
Retail usage treats VWAP as a line on the chart. Price above VWAP means buyers are in control; below means sellers are. Traders buy pullbacks to VWAP in an uptrend and sell rallies to it in a downtrend.
The logic is that VWAP represents where the average participant is positioned, so it acts as support or resistance. Sometimes it does, mostly because enough traders are watching the same line.
Why the signal use is weaker
VWAP resets daily and describes the past. It says where the average trade happened, not where the next one will. As a systematic input it has modest predictive value on its own and works better as one feature among many.