Volume Weighted Average Price (VWAP)

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Volume-Weighted Average Price (VWAP)

What is VWAP?

The volume-weighted average price (VWAP) is an intraday technical indicator that shows the average price a security has traded at during a trading session, weighted by trading volume. It appears as a single smooth line on intraday charts and resets at the start of each trading day. Traders and institutions use VWAP to assess price trends, liquidity, and execution quality.

Why VWAP matters

  • Combines price and volume to give a more representative average than a simple price average.
  • Acts as a benchmark for trade execution—institutions often try to buy below VWAP or sell above it to minimize market impact.
  • Helps identify intraday value: prices below VWAP may be considered relatively cheap; prices above VWAP may be relatively expensive.

Formula and calculation

Core formula:
VWAP = (Sum of (Price × Volume)) / (Sum of Volume)

A commonly used approximation uses the typical price for each interval:
Typical Price = (High + Low + Close) / 3
Then for each interval:
PV = Typical Price × Volume
Cumulative PV = running total of PV
Cumulative Volume = running total of Volume
VWAP = Cumulative PV / Cumulative Volume

Calculation steps (for any intraday interval, e.g., 1-, 5-, or 15-minute):
1. Compute Typical Price for the interval: (High + Low + Close) / 3.
2. Multiply Typical Price by the interval’s Volume → PV.
3. Add PV to cumulative PV and add Volume to cumulative Volume.
4. Divide cumulative PV by cumulative Volume to get the current VWAP.
Charting platforms compute this automatically.

How traders use VWAP

  • Trend confirmation: Price trading consistently above VWAP suggests intraday bullishness; below VWAP suggests intraday bearishness.
  • Entry/exit signals: Traders may go long when price crosses above VWAP and consider selling or shorting when it crosses below.
  • Execution benchmark: Large traders aim to execute orders close to VWAP to avoid moving the market and to achieve a fair average price.
  • Liquidity assessment: VWAP highlights where trading volume has concentrated, indicating price levels with agreement between buyers and sellers.

VWAP vs. Simple Moving Average (SMA)

  • VWAP includes volume; SMA uses only price (typically closing prices).
  • VWAP is intraday and resets each session; SMA is calculated across fixed lookback periods and can span multiple days.
  • VWAP tends to be smoother early in the session and becomes more lagging as the day progresses because it accumulates data.

Limitations

  • Single-day indicator: VWAP resets daily; combining multiple days can distort interpretation.
  • Lagging nature: VWAP is based on historical transactions and is not a predictive indicator.
  • Can miss strong trends: In sustained moves, price may stay well above or below VWAP for extended periods, which can make VWAP-based signals late or unhelpful.
  • Not a standalone signal: Best used in conjunction with other analysis (price action, support/resistance, volume patterns).

Practical tips

  • Use VWAP for intraday strategies and for judging execution quality, not for long-term trend forecasting.
  • Combine with volume spikes, price patterns, or other indicators to filter signals and reduce false entries.
  • For algorithms and large orders, consider slicing executions around VWAP to minimize market impact.

Key takeaways

  • VWAP = (sum of price × volume) / (sum of volume); it weights price by traded volume and resets each trading day.
  • Useful as an intraday benchmark for value, trend confirmation, and execution quality.
  • Differs from SMA by incorporating volume and by being anchored to the current trading session.
  • Has limitations: single-day scope, lagging behavior, and potential to miss prolonged trends—use alongside other tools.