Wha𝓰t Is the Volume-Weighted Average Price (VWAP)?🀅

The volume-weighted average price (VWAP) is a technical analysis indicator used on intraday charts that resets at the start of every new trading session. It's the average price a security has traded at throughout the day, based on both volume and price.

VWAP is important because it provides traders with insight into both the pri♕ce trend and value of a security.

Understanding th♒e Volume-Weighted Average Pric🐼e (VWAP)

VWAP is calculated by totaling the dollars traded for every transaction (price multiplied by the volume) and then dividing by the total shares traded.🅘 This can be desc💜ribed in a formula such as the following:

VWAP = (Sum of (Tick Price ×Tick Volume)) / Trading Volume

However, not all traders have a data ꦛsource that gives them this level of information. Traders and chart ♏vendors often use a substitute formula designed to get close to VWAP.

Formula

Popular charting pac♈kages typica♏lly use a formula for closely approximating VWAP, such as:

$\begin{aligned}&\textbf{VWAP }\mathbf{= }\frac{\textbf{Cumulative Typical Price }\mathbf{\times}\textbf{ Volume}}{\textbf{Cumulative Volume}}\\&\textbf{where:}\\&\text{Typical Price}=\text{High price}+\text{low price}+\text{closing price/3}\\&\text{Cumulative}=\text{Total trades since the trading session opened}\end{aligned}$​VWAP =Cumulative VolumeCumulative Typical Price × Volume​where:Typical Price=High price+low price+closing price/3Cumulative=Tot꧅al trades since 𒁃the trading session opened​

How to Calculate VWAP

By adding the VWAP indicator to a streaming chart, the calculation will be made automaticallไy. However, to calcul💃ate the VWAP yourself, follow the steps below.

Assume a five-🅰minute chart. T♛he calculation is the same regardless of what intraday time frame is used.

1. Find the average price the stock traded at over the first five-minute period of the day. To do this, add the 澳洲幸运5开奖𝐆号码历史查询:high, low, and close, then divide by three. Multiply this by the volume for that period. Record the result in a spreadsheet, under column PV (price, volume).
2. Divide PV by the volume for that period. This will produce the VWAP.
3. To maintain the VWAP throughout the day, continue to add the PV value from each period to the prior values. Divide this total by the total volume up to that point.

To make Step 3 easier in a spreadsheet, create columns for🎃 cumulative PV and cumulative volume and apply the formula to these 🦩figures.

How Is VWAP Used?

VWAP is used in different ways by traders. Traders may use it as 澳洲幸运5开奖号码历史查询:a trend confirmation tool and build trading rules around it. For instance, they may consider stocks with prices below VWAP as undervalued and those with prices above it as overvalued. If prices below VWAP move above it, traders may go long on the stock. If prices above VWAP move below it, they may sell their positions or initiate 澳洲幸运5开奖号码历史查询:short positions.

Institutional buyers (including mutual funds) use VWAP to help move into or out of stocks with as small of a market impact as possible. Therefore, when they can, institutions will try to buy below the VWAP or sell above it. This way their actions push the price back toward the average, instead of away from it.

VWAP vs. Simple Moving Average

On a chart, VWAP and a 澳洲幸运5开奖号码历史查询:simple moving average (SMA) may look similar. However, these two indicators are calculated diꩵfferently and represeꦰnt different results.

VWAP is calculated by multiplying♈ the typical price by volume and then dividing by total volume.

A simple moving average incorporates price but not volume. The SMA is calculated by totaling 澳洲幸运5开奖号码历史查询:closing prices over a certain period (say, 10 days) and then dividing the total by the number of ♒periods (e.g., 10).

Limitations of VWAP

1. VWAP is a single-day indicator and restarts at the opening of each n𒆙ew trading day. Attempting to create an average VWAP over many days could distort it and result in an incorrect indicator.

2. While some institutions may prefer to bu🐼y when th⛦e price of a security is below the VWAP or sell when it is above, VWAP is not the only factor to consider.

In strong uptrends, the price may continue to move higher for many days without dropping below the VWAP at all or only occasionally. Therefore, waiting for the price to fal💝l below VWAP could mean a missed opportunity if prices are rising quickly.🔥

3. VWAP is based on historical values and does not inheren𒁏tly have predictive qualities or calculations. VWAP is anchored t൩o the opening price range of the day. Therefore, the indicator increases its lag as the day goes on.

This can be seen in the way a one-minute period VWAP calculation after 330 minutes (the length of a typical trading session) will often resemble a 390-minute moviꦆng average at the end of the𒊎 trading day.

The Bottom Line

VWAP is a technical analysis indicator used by traders during single trading sessions to determine the average price of a security, which is based on price🌜 and volume. It can provide traders with insight about liquidity and price movement during🐼 the day.