VWAP is one of the single-most important technical indicators for traders for a variety of reasons. Especially intraday VWAP, which is the most common way VWAP trades are structured, and resets each day. What this ends up meaning is that it is timeframe agnostic during the day. 

As a technical distinction, VWAP is not a moving average but simply the “volume-weighted average price”. VWAP uses a window that gets longer throughout the day, making it more sluggish until the close. Its formula is [cumulative price x volume] / [total volume]. In contrast, the less-used VWMA (volume-weighted moving average) uses a fixed rolling window and divides the average [price x volume] / [average volume]. 

In contrast, simple/exponential/displaced moving averages will change depending on what timeframe they are on, such as 1-minute vs 5-minute candles. What this means for traders is that everyone is seeing and reacting to the same VWAP. For that reason, only intraday VWAP has major significance; anchored spin-offs of it can be thought of as noise in comparison since anyone using anchors would have arbitrary versions of it, rather than the main intraday version which actively gets used by institutional algos throughout the day, every day.

For illustration, VWAP is pictured here as the blue line, with it being compared to a pair of exponential moving averages: 

<Chart with VWAP retrieved from DAS Trader>

Intermediate: VWAP and Accumulation or Distribution 

The main use for VWAP by major institutions is to implement their accumulation/distribution campaigns. The idea is that buying at VWAP is fair value, below it is a discount, and above it is a premium. Major players who are falling behind on their accumulation/distribution campaigns are willing to buy at a premium because they have more urgency. Day traders will see this and realize that they can buy on these bullish VWAP divergences as these rushed accumulation campaigns continue.

This idea of VWAP as fair value means that traders may elect to think of VWAP as the actual value of the stock, with the price being euphoric deviations from it. What this also means is that the actual direction of VWAP can be used to interpret the direction of the trend for that session. As an analogy, the foam in beer can be thought of as the price, while the level of the beer is the actual value. Eventually, the foam ends up settling and reverting to the level of the beer. This same figurative language is what is meant when market commentators say that prices are frothy. 

Advanced: Strategy

In general, VWAP tends to function as strong intraday support and resistance. And like any other support/resistance lines, they are stronger when aligned with major levels in liquidity, heavy OI in the options market, prior high/lows, or volume by price.

The tradable patterns can be easy to detect when VWAP acts as support or resistance repeatedly throughout a day. For example, if the price keeps bouncing on top of VWAP, then this is a sign of net accumulation among major players. And if the price keeps getting rejected by VWAP, then this is a sign of distribution. This is an especially bearish pattern with a powerful psychological explanatory force behind it because it means short sellers keep missing their entrances from the price merely bouncing to lower highs rather than previous levels. Eventually, many of those sellers (who intended to short higher) end up shorting at lower levels. As a result of this cascading dynamic, there can be a directional edge in only making bearish spot plays below VWAP and only making bullish spot plays above it.

However, if conditions are not trending (such as having an ADX reading under 25) and neither big sellers nor buyers are in control, then it is likely to chop around VWAP, with it becoming more of a target for mean reversion than functioning as support/resistance.