VWAP (Volume Weighted Average Price) is the average price weighted by volume throughout a trading session. It is widely used as a benchmark for execution quality.
Volume Weighted Average Price (VWAP) is the average price a security has traded at throughout the day, weighted by volume at each price level. Unlike simple averages, VWAP gives more importance to prices where heavy trading occurred. Institutional traders use VWAP as a benchmark for execution quality, while traders use it as dynamic support and resistance.
The calculation:
VWAP = Cumulative (Typical Price × Volume) / Cumulative Volume Where: Typical Price = (High + Low + Close) / 3
How VWAP builds throughout the day:
Period 1: Typical Price $50, Volume 100,000 Period 2: Typical Price $51, Volume 150,000 Cumulative: ($50 × 100,000 + $51 × 150,000) / 250,000 = $50.60
Why VWAP matters:
<ul>Interpreting VWAP:
- Price above VWAP: Buyers paying above average; bullish intraday
- Price below VWAP: Sellers accepting below average; bearish intraday
- Price at VWAP: Fair value zone; equilibrium
Trading applications:
- Intraday trading: Buy below VWAP; sell above VWAP
- Trend following: Stay long while price above VWAP
- Entry timing: Enter longs on pullbacks to rising VWAP
- Target setting: Use VWAP as profit target
VWAP for execution:
- Better than VWAP: Bought below or sold above daily average
- Worse than VWAP: Paid premium (buying) or accepted discount (selling)
- Algorithmic trading: VWAP algorithms aim to match benchmark
Limitations:
- Intraday only: VWAP resets each day; not useful for multi-day analysis
- Late-day distortion: Becomes less useful as day progresses (more cumulative)
- Not predictive: Shows where trading occurred, not where price will go
- Gaps: Opening gaps make early VWAP less relevant
Anchored VWAP:
Some traders use anchored VWAP starting from specific events (earnings, breakouts) for multi-day analysis, though traditional VWAP is a single-day indicator.
VWAP is essential for intraday traders and invaluable as an institutional benchmark. Its volume-weighting provides a more meaningful average price than simple time-weighted averages.