What Is the Volume-Weighted Average Price (VWAP)?

Volume weighted average price (VWAP) is an intraday chart technical analysis indicator that resets at the beginning of each new trading session. It is a benchmark for trading that shows the daily average price at which a security has traded in terms of both volume and price.

VWAP is significant since it gives traders access to pricing information on a security's movement and value.

VWAP Explained

The volume weighted average price (VWAP), as the name implies, is the average stock price adjusted for the volume of trades. The average price of a stock over a length of time is determined using the VWAP.

Investors can easily pick when and where to enter and exit the market by comparing the volume weighted average price of the stock to a benchmark. Additionally, the VWAP can help investors choose an approach to a company and execute the proper move at the right time.

Each period's volume weighted average price can be generated to display the VWAP for each single data point on the stock chart. The VWAP is automatically determined by the trading software, therefore an investor does not always need to calculate the VWAP since it is automatically generated.  The investor merely needs to define how many periods they want to take into account when calculating the VWAP.

The stock's true average price is determined by the volume weighted adjusted price, which has no bearing on the stock's closing price. Since the VWAP calculation is based on historical data, it lags behind the moving average and is therefore best suitable for intraday trading.

VWAP can be used by traders to confirm trends and to create trading rules. For instance, they might view equities as undervalued or overvalued depending on whether their prices are below or above VWAP. Investors may buy the stock if prices fall below VWAP and rise above it. They might sell their positions or start short positions if prices above VWAP fall.

VWAP enables institutional buyers, including mutual funds, to enter or exit the stock market with the least amount of market impact feasible. Institutions will therefore attempt to buy below the VWAP or sell above it whenever they can. In doing so, they move the price back toward the average rather than away from it.

Calculating VWAP

Each day, the volume-weighted average price is determined. It begins at the opening of the markets and finishes when they close down for the day. The calculation requires intraday data because it is performed every day.

VWAP is determined by adding up all of the money traded for each transaction (price times volume), divided by the overall number of shares moved.

The following equation can be used to determine VWAP:

Volume weighted average price = Typical price x volume/ Cumulative Volume

·        Where Typical Price = High price + Low price + Closing Price/3

·        Cumulative = total since the trading session opened.

The calculation will be executed automatically when the VWAP indicator is added to a streaming chart. However, use the steps listed below to compute the VWAP on your own:

1.     Find the stock's average price for the first five minutes of the day. Add the high, low, and close, then divide by three to get this. This is multiplied by the volume for that time period. In a spreadsheet, note the outcome in column PV.

2.     Subtract PV from the volume for that time period. The VWAP will result from this.

3.     Continue adding the PV value from each period to the earlier values to retain the VWAP throughout the day. By the volume up to that point, divide this total.