What is VWAP (Volume Weighted Average Price)

Volume weighted average price (VWAP) is a trading indicator that shows the average price at which a security has traded during a particular trading day, based on both price and trading volume. In simple terms, VWAP helps traders understand the true average price of a stock by considering how many shares were traded at different price levels, instead of just averaging prices over time. VWAP is important because it provides a more realistic picture of a stock’s price movement. This article explains what is VWAP indicator in stock market, how it is calculated, its importance, and how traders use it to make informed trading decisions. 

How to Calculate VWAP? 

After understanding what is volume weighted average price, let's get into its calculation. VWAP (volume weighted average price) is generated daily using intraday data that begins with the market's opening and ends with its closing time. The Volume Weighted Average Price formula: 

VWAP = (Cumulative Typical Price * Volume) ÷ (Cumulative Volume) 

Example: 

In the equation above, the normal price is the average of the high, low, and closing prices. You may compute it using the following formula:  

Cumulative Typical Price (TP) = high price + low price + closing price/three. 

Let's have a look at an example to help you grasp the computation. Let us imagine that the maximum price is 20, the low price is 10, and the average closing price is 15. Using the standard pricing calculation, we get TP = 20+10+15/3 = 15. 

Then, multiply the TP by the volume. Assume the volume of the period is (V) = 20. Thus, TP*V equals 300. Cumulative volume for the stock, which in this case is assumed to be = 75.  

So, VWAP = TP*V/CV = 300/75 = 4 

The VWAP may be calculated for each period, resulting in the creation of a curve on the price chart.  

How is VWAP Used? 

The VWAP can be used in the following manner: 

Identifying Market Trend 

Traders use VWAP to understand the overall market direction. If the stock price stays above VWAP, it generally indicates buying strength, while trading below VWAP may suggest selling pressure. 

Determining Buy Opportunities 

VWAP helps traders identify potential buying levels. Many traders consider buying a stock when its price moves near or slightly below VWAP, as it may indicate a favourable entry price. 

Determining Sell Opportunities 

Traders may consider selling when the stock price moves above VWAP. This may indicate that the stock is trading at a relatively higher price during the day. 

Acting as Support and Resistance 

VWAP indicator often acts as an important price level where the stock may bounce back or face resistance. Traders use this level to plan entry and exit points. 

Supporting Institutional Trading 

Large investors use the VWAP indicator as a benchmark to execute bulk trades. It helps them complete transactions gradually without causing sharp price movements in the market. 

Importance of VWAP 

The VWAP plays important role in following ways: 

1. Provides Fair Price Assessment 

VWAP gives a complete and reliable view of the average trading price. This helps traders understand whether they are getting a fair deal. In many cases, it works as a strong reference point for price comparison.  

2. Helps Identify Market Trends 

VWAP helps traders see whether the market is moving upward or downward. This is important today as markets change quickly. A price moving above VWAP means strength, while a price below it may suggest weakness. 

3. Supports Better Trade Execution 

Institutional investors will often use VWAP when executing larger orders of stock with less volatility. It assists traders when they are diversifying their trades in different time periods throughout the day to minimise any extreme price fluctuations. 

4. Supports Disciplined Trading Decisions 

Traders utilise the VWAP indicator to base their trading decisions on actual market data instead of their personal emotions and the unverified information circulating in the market. The use of VWAP as a trading reference point enables traders to execute their trading systems while maintaining their established trading patterns. 

5. Suitable for Traders at All Experience Levels 

VWAP is simple to understand and easy to apply. The system benefits both beginner traders who want to understand market trends and advanced traders who need precise price data for their trading decisions. 

Pros and Cons of VWAP 

Here are the pros and cons of VWAP: 

Conclusion 

Understanding VWAP full form is crucial as it is an important trading indicator that combines price and volume to analyse market movements. It is frequently used in the trading industry to identify fair price levels, supporting various trading strategies. In data-driven trading environments, VWAP provides valuable insights into market trends, making it a useful tool for traders at different experience levels. Its ability to promote disciplined trading and compatibility with modern trading platforms like online trading app allows traders to make well-informed decisions. Gaining proficiency in VWAP can lead to improved market analysis and overall trading effectiveness.