VWAP Indicator

What is VWAP? 

Volume Weighted Average Price (VWAP) helps everyday traders comprehend the average price that the asset traded during the day by taking volume and price into consideration. It is an essential trading benchmark that is charted daily, beginning with the opening price and finishing with the closing price.

How is VWAP Calculated?

The computation begins with the market's opening bell and concludes with the closing bell. As the VWAP is an intraday indicator, it is calculated using intraday data.

Today, owing to technology improvements, you can quickly add any popular technical indicator, such as the VWAP, to a price chart with a few clicks. The next section will discuss how to compute the VWAP manually in depth.

The mathematical method for calculating the volume-weighted average price is: 

VWAP = Typical Price*Volume/Cumulative Volume

Why Is VWAP Used?

VWAP is used differently by different sorts of traders. For example, they may use it to corroborate trends. A trader who uses the VWAP as a trend confirmation tool may use it to initiate trading positions. So, if the price falls below the VWAP and rises above it, the trader may enter long bets. 

On the other hand, if the price above the VWAP drops below it, the trader may go short. Institutions such as insurance firms, mutual funds, and hedge funds may utilise the VWAP to conduct transactions with little market effect.

Importance of Volume Weighted Average Price

The VWAP provides information on the stock's actual average price. This indicator is similar to the moving average, which is based on past data and facilitates decision-making in intraday trading. Among investors, a VWAP is an often used instrument. The following are some of VWAP's benefits: 

• The moving average is not as good as this indicator.
• It may suggest a trend that is bullish or negative.
• This signal is useful for both long and short positions.

Difference Between VWAP and a Moving Average

Plotting both indicators together on a chart could make them look identical. Both, nonetheless, differ greatly in terms of technicality. VWAP is computed using volume as an integral variable. In contrast, the moving average merely takes into account the price over a predetermined time period and ignores the volume traded. Investors can adopt better informed trading positions since VWAP in share market additionally considers the volume traded.

What is Anchored VWAP?

The VWAP is calculated continuously from the start of the market open to the closing. For various reasons, a trader may choose to set the starting point for computing VWAP at a time other than the open. This is when an anchored VWAP is employed. An anchored VWAP begins calculating from a user-selected beginning period. There are several reasons for utilising an anchored VWAP, including attempting to normalise a price owing to a huge price difference up or down.

VWAP Trading Strategy

• The volume-weighted average price (VWAP) is a useful indicator for identifying asset trends and market trends. 
• A price above the VWAP indicates a bullish trend, while a price below it indicates a bearish market. This relationship can be used to make trades, with long positions taken when the price drops above the VWAP line, and short positions taken when it breaks under it.  
• Institutions use this to minimise market impact. With VWAP breakout stocks, traders can initiate long positions when the price breaks above the VWAP line, suggesting a potential uptrend, and short positions when the price breaks below the VWAP line, indicating a possible downtrend. 

Read more about the VWAP Trading Strategy Here.