Volume Weighted Average Price (VWAP)

The Volume Weighted Average Price (VWAP) is a trading benchmark used by traders that gives the average price a security has traded at throughout the trading day, based on both volume and price. VWAP is calculated by taking the sum of the price multiplied by the volume and dividing it by the total volume.

How VWAP is Calculated

To calculate VWAP, the price and volume for each transaction are multiplied together to calculate the dollar volume. The cumulative sum of these dollar volumes is then divided by the cumulative sum of the volume to arrive at the VWAP.

Using VWAP for Trading

Traders often use VWAP as a trading strategy or benchmark to gauge the efficiency of their trades. By comparing the actual price of a security to the VWAP, traders can determine whether they bought or sold the security at a favorable price.

VWAP can also be used to identify potential support and resistance levels in a security. If the current price of a security is below the VWAP, it may indicate a buying opportunity, as the security is potentially undervalued. Conversely, if the price is above the VWAP, it may be a sign to sell, as the security may be overvalued.

Limitations of VWAP

While VWAP can be a useful tool for traders, it is important to note that it is based on historical data and may not accurately predict future price movements. Additionally, VWAP may be influenced by large trades, which can skew the calculations and misrepresent the true average price of a security.

Despite these limitations, VWAP remains a widely used benchmark in the trading industry and can provide valuable insights for traders looking to optimize their trading strategies.