What is VWAP?
The Volume Weighted Average Price (VWAP) is a trading benchmark calculated by taking the total dollar value of all trades for a security and dividing it by the total volume of trades. This gives more weight to prices where more volume occurred, providing a fair value reference point.
Unlike simple moving averages that only consider price, VWAP incorporates volume data, making it particularly valuable for institutional traders who need to execute large orders without significantly impacting market prices. It serves as both a trading strategy and a performance benchmark.
VWAP Calculation
Formula and Components
VWAP = Σ(Price × Volume) / Σ(Volume)
Step-by-Step Calculation
- Calculate typical price: (High + Low + Close) ÷ 3
- Multiply typical price by volume
- Sum all price×volume values
- Sum all volume values
- Divide total price×volume by total volume
Key Characteristics
- • Resets daily at market open
- • Cumulative throughout trading day
- • Weighted by volume, not time
- • Provides dynamic support/resistance
- • Updates with each new trade
VWAP vs Other Averages
VWAP
- • Volume weighted calculation
- • Intraday cumulative
- • Fair value benchmark
- • Institutional focus
- • Resets daily
Moving Average
- • Price-only calculation
- • Fixed period lookback
- • Trend identification
- • All trader types
- • Continuous across days
TWAP
- • Time weighted calculation
- • Equal time intervals
- • Execution benchmark
- • Algorithm trading
- • Customizable periods
Sponsored Insight
VWAP Trading Strategies
Institutional Strategies
VWAP Execution
- • Buy below VWAP, sell above VWAP
- • Minimize market impact
- • Benchmark performance measurement
- • Large order execution strategy
- • Algorithm trading reference
Portfolio Management
- • Performance attribution analysis
- • Trade cost analysis (TCA)
- • Execution quality measurement
- • Risk management tool
- • Compliance monitoring
Retail Trading Applications
Support and Resistance
- • VWAP acts as dynamic S/R level
- • Price above VWAP = bullish bias
- • Price below VWAP = bearish bias
- • Reclaiming VWAP signals strength
- • Multiple touches increase significance
Mean Reversion
- • Price tends to return to VWAP
- • Fade extreme deviations
- • Use with other indicators
- • Risk management essential
- • Best in ranging markets
Multi-Timeframe VWAP
Daily VWAP
- • Most common timeframe
- • Intraday trading reference
- • Resets at market open
- • Fair value for the day
Weekly VWAP
- • Longer-term reference
- • Swing trading applications
- • Stronger significance
- • Major S/R levels
Monthly VWAP
- • Major trend reference
- • Position trading tool
- • Long-term fair value
- • Institutional benchmarks
Sponsored
VWAP Indicators & Variations
VWAP Bands
Standard Deviation Bands
- • VWAP ± 1 standard deviation
- • VWAP ± 2 standard deviations
- • Similar to Bollinger Bands concept
- • Show price deviation extremes
- • Mean reversion opportunities
Trading Applications
- • Upper bands = potential resistance
- • Lower bands = potential support
- • Band expansion = increased volatility
- • Band contraction = consolidation
- • Breakouts beyond 2σ significant
Anchored VWAP
Custom Anchor Points
- • Start calculation from specific events
- • Earnings announcements
- • Economic releases
- • Significant news events
- • Market structure changes
Strategic Applications
- • Event-driven trading
- • Long-term position tracking
- • Portfolio rebalancing
- • Risk management reference
- • Performance measurement
Advantages vs. Limitations
Advantages
Volume Weighted
Reflects actual trading activity and liquidity
Fair Value Reference
Institutional benchmark for trade quality
Dynamic Support/Resistance
Updates in real-time with market activity
Multiple Timeframes
Applicable across various trading styles
Limitations
Lagging Indicator
Based on historical price and volume data
Intraday Only
Traditional VWAP resets daily
Volume Dependency
Less effective in low-volume conditions
No Predictive Power
Shows fair value, not future direction
Key Takeaways
Institutional Standard: VWAP is the primary benchmark used by institutions to measure execution quality and fair pricing.
Volume Integration: Unlike simple averages, VWAP weights prices by volume, providing more accurate fair value representation.
Dynamic Reference: VWAP serves as real-time support and resistance, adapting to changing market conditions.
Versatile Tool: Applicable for execution, analysis, and strategy across multiple timeframes and asset classes.
Master VWAP Trading
Learn advanced VWAP strategies and institutional techniques
Related Trading Concepts
Volume
Number of shares traded - the key component in VWAP calculation.
Moving Average
Price-based average that complements VWAP analysis.
Support & Resistance
Key levels where VWAP often acts as dynamic support or resistance.
Liquidity
Market depth and ease of execution that VWAP helps measure.
Algorithm Trading
Automated strategies that often use VWAP as execution benchmark.
Market Microstructure
The mechanics of trading that VWAP analysis reveals.
VWAP Trading Risk Disclaimer
VWAP is a reference tool and does not guarantee profitable trades. Past volume and price patterns do not predict future results. VWAP strategies can fail during low volume periods or extreme market conditions. Market impact from large orders can move prices away from VWAP quickly. Always use proper risk management, combine VWAP with other analysis tools, and never risk more than you can afford to lose. Consider consulting with qualified financial professionals before implementing VWAP-based strategies.