VWAP (Volume Weighted Average Price)
VWAP, or Volume Weighted Average Price, is a trading benchmark used by traders that gives the average price a security has traded at throughout the day, based on both volume and price. It is calculated by taking the average price of a security throughout a trading day, based on both the volume and price of trades that are executed.
How VWAP is Calculated
To calculate VWAP, the following formula is used: VWAP = (∑(Price * Volume)) / ∑Volume. This equation takes into account the total dollar amount traded for a security throughout the day, divided by the total volume traded for that security.
Uses of VWAP
VWAP is often used by institutional investors and traders to determine whether they got a good price on their trades. By comparing the actual execution price of a trade to the VWAP, traders can gauge their performance. Additionally, VWAP can also be used by traders to identify trends and potential areas of support and resistance in a security’s price movement.
Limitations of VWAP
While VWAP can be a useful tool for traders, it is important to note that it is a lagging indicator and may not always accurately reflect current market conditions. Additionally, VWAP calculations can be skewed by large institutional orders that significantly impact the average price traded throughout the day.
