VWAP

DEFINITION of VWP

VWAP represents for the volume-weighted average price. The trading benchmark that is often used by passive investors. It demonstrates the ratio of an asset’s price to its total trade volume.

WHAT IT IS IN ESSENCE

Volume Weighted Average Price is equal to the sum of the volume of every transaction multiplied by the price of every transaction divided by the total volume for the trading day. A trading benchmark particularly used in pension plans. Calculated by adding up the dollars traded for every transaction (price times shares traded) and then divide by the total shares traded for the day. The theory is that if the price of a buy trade is lower than the volume-weighted average price, it is a good trade. The opposite is true if the price is higher than the VWAP.

The volume-weighted average price is a powerful indicator for choosing stocks. It’s considered a standard calculation for determining the average price of a stock over a certain period of time.

The general idea with VWAP is that you can assess the current price of the stock in relation to this benchmark, which will help you determine entry and exit points. It can also help you determine whether you want to take an aggressive or more cautious approach toward the trade.

HOW TO USE

Calculation for VWAP:

 

VWAP = Total dollar price of all the shares traded in a given day/Total volume for that day

 

Traders use VWAP to provide that all trades match the volume of trades being made in the market. This provides high liquidity, which usually leads to lower transaction costs.

It is particularly useful when trading large numbers of shares.

Striving to buy a large volume of a single stock on the market would unnaturally increase its price.

Traders are using VWAP to secure that they aren’t overinflating the trading volume for the asset they want to buy.