Volume Weighted Average Price

The Volume Weighted Average Price (VWAP) is a trading benchmark commonly used in financial markets. It represents the average price a security has traded at throughout the day, based on both volume and price. It is particularly useful for day traders and is often used to determine market direction and as a trading signal.

Definition

VWAP is calculated by taking the dollar amount of all trading periods and dividing it by the total trading volume for the current day. The theory behind VWAP is that it represents the “fair price” of the asset for the day and that trading near this price is more favorable for traders.

Calculation

The formula for VWAP is:

VWAP = Cumulative (Price × Volume) / Cumulative Volume​

To calculate VWAP:

1. Multiply the typical price by the volume for each period (usually minute by minute): The typical price for each period is calculated as the average of the high, low, and closing prices.
2. Cumulate these values for the day.
3. Divide by the total volume up to that point.

Example

Data:

• Period 1: Price = $100, Volume = 200 shares
• Period 2: Price = $102, Volume = 150 shares
• Period 3: Price = $101, Volume = 250 shares

Steps:

1. Calculate Price * Volume for Each Period:
   • Period 1: $100 * 200 = $20,000
   • Period 2: $102 * 150 = $15,300
   • Period 3: $101 * 250 = $25,250
2. Cumulative (Price * Volume):
   • $20,000 (Period 1) + $15,300 (Period 2) + $25,250 (Period 3) = $60,550
3. Cumulative Volume:
   • 200 shares (Period 1) + 150 shares (Period 2) + 250 shares (Period 3) = 600 shares
4. Calculate VWAP:
   • VWAP = Total (Price * Volume) / Total Volume
   • VWAP = $60,550 / 600 shares
   • VWAP ≈ $100.92

So, the VWAP for this stock, based on these three periods, is approximately $100.92.

Usage in Financial Analysis

• Trading Benchmark: VWAP is used as a trading benchmark. Trades executed near the VWAP are considered to be more favorable.
• Buy and Sell Signals: Prices above the VWAP indicate a bullish market and can be a buying signal. Conversely, prices below the VWAP may indicate a bearish market and a potential selling signal.
• Volume Analysis: Since VWAP incorporates volume, it provides insights that price-only indicators cannot.

VWAP is most applicable and useful on an intraday timeframe and loses its effectiveness for longer-term trading analysis. It’s often used in combination with other indicators and strategies for the best results.