What Is the Vo❀lume-Weighted Average Price (VWAP)?

The volume-weighted average price (VWAP) is a technical analysis indicator used on intraday charts that resets at the start of every new trading session. It's the average price a security has traded at throughout the day, based on both volume and price.

VWAP is important because it provides traders with insight into both the price trend and value of a security⭕.

Understanding the Volume-Wei🍃ghted Average Prღice (VWAP)

VWAP is calculated by totaling the dollars traded for every transaction (price multiplied by the volume) and then dividing by t🉐he total shares traded. This can be described in a formula such as the following:

VWAP = (Sum of (Tick Price ×Tick Volume)) / Trading Volume

However, not all traders have a data source that gives them this level of information. Traders and chart vendors often use a substitute formula designed to g🧜et close to VWAP.

Formula

Popular charting packages typically use a formula for closely approximating VWAP, such aཧs:

$\begin{aligned}&\textbf{VWAP }\mathbf{= }\frac{\textbf{Cumulative Typical Price }\mathbf{\times}\textbf{ Volume}}{\textbf{Cumulative Volume}}\\&\textbf{where:}\\&\text{Typical Price}=\text{High price}+\text{low price}+\text{closing price/3}\\&\text{Cumulative}=\text{Total trades since the trading session opened}\end{aligned}$​VWAP =Cumulative VolumeCumulative Typical Price × Volume​where:Typical Price=High price+low price+closing price/3Cumulative=Total trades since the ౠtrading session oꩲpened​

How to Calculate VWAP

By adding the VWAP indicator to a streaming chart, the calculation will be made automaticallꦰy. However, to calculate the VWAP yourself, follow the steps below.

Ass🦂ume a five-minute chart. The calculation is the same regardless of what intraday time frame is used.

1. Find the average price the stock traded at over the first five-minute period of the day. To do this, add the 澳洲幸运5官方开奖结果体彩网:h🅠igh, low, and close, then diꦗvide by three. Multiply this by the volume for that period. Record the result in a spreadsheet, under column PV (price, volume).
2. Divide PV by the volume for that period. This will produce the VWAP.
3. To maintain the VWAP throughout the day, continue to add the PV value from each period to the prior values. Divide this total by the total volume up to that point.

To make Step 3 easier in a spreadsheet, create columns for cumulative PV and cumulative volume and apply♊ the formula to these figures.

How Is VWAP Used?

VWAP is used in different ways by traders. Traders may use it as 澳洲幸运5官方开奖结果体彩网:a trend confirmation tool and build trading rules around it. For instance, they may consider stocks with prices below VWAP as undervalued and those with prices above it as overvalued. If prices below VWAP move above it, traders may go long on the stock. If prices above VWAP move below it, they may sell their positions or initiate 澳洲幸运5官方开奖结果体彩网:short positions.

Institutional buyers (including mutual funds) use VWAP to help move into or out of stocks with as small of a market impact as possible. Therefore, when they can, institutions will try to buy below the VWAP or sell above it. This way their actions push the price back toward the average, instead of away from it.

VWAP vs. Simple Moving Average

On a chart, VWAP and a 澳洲幸运5官方开奖结果体彩网:simple moving average (SMA) may look similar. However, t🔯hese two indicators are calculated differently and represent different results.

VWAP is calculated by multip🍬lying the typical price by volume and then dividing by total volume.

A simple moving average incorporates price but not volume. The SMA is calculated by totaling 澳洲幸运5官方开奖结果体彩网:closing prices over a ce𒆙rt🐲ain period (say, 10 days) and then dividing the total by the number of periods (e.g., 10).

Limitations of VWAP

1. VWAP is a single-day indicator and restarts at 💞the opening of each new trading day. Attempting to create an average VWAP over many days could distort it and result in an incorrect indicator.

2. While some institutions may prefer to buy when the price of a security is below the VWAP or sell when⭕ it is above, VWAP is not the only factor to consider.

In strong uptrends, the price may continue to move higher for many days without dropping below the VWAP🐓 at all or only occasionally. Therefore, waiting for the price to fall below VWAP could mean a missed opportunity if prices are rising quickly.

3. VWAP is based on historical values🐷 and does not inherently have predictive qualities or calculations. VWAP is anchored to the opening price range of the day. Therefore, the indicator increases its lag as the daܫy goes on.

This can be seen in the way a one-minute period VWAP calculation afte🐟r 330 minutes (the length of a typical trading session) willꦉ often resemble a 390-minute moving average at the end of the trading day.

The Bottom Line

VWAP is a technical analysis indicator used by traders during single trading sessions to determiﷺne the average price of a security, which is based on price and volume. It can provide traders with insight about liquidity and price movement during the day.