Volume Weighted Average Price ?

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Volume-weighted average price, or VWAP, is a technical analysis tool that displays the relationship between an asset's price and its total volume of trades. It gives investors and traders a gauge of the typical price at which a stock is traded over a predetermined time frame.


Investors who choose to be more passive in the market—typically pension funds and mutual funds—as well as traders who want to know whether a stock was purchased or sold at a fair price—often use VWAP as a benchmark.


To calculate VWAP, you use the following equation:

VWAP = ∑(amount of asset bought x asset price)/total shares bought that day

The standard VWAP is calculated using all of the orders of a given trading day, but it can also be used to look at multiple time frames.

The VWAP ratio is then presented on a chart as a line. It has been likened to a moving average, in that when the price is above the VWAP line the market is seen as in an uptrend, and when the price is below the VWAP the market is in a downtrend.

Cons and benefits of VWAP

Benefits of VWAP

In algorithmic trading, VWAP ratios are used to assist traders and investors in choosing the optimal price at which to purchase or sell, consistent with the market's volume. High liquidity generally results in optimum execution and cheaper transaction costs for traders.


VWAP is very helpful when dealing a lot of shares. By employing VWAP, traders may make sure they aren't artificially inflating the trading volume for the asset they want to buy. Trying to buy a big volume of a single stock on the market could cause its price to rise.

Issues with VWAP

Utilizing the VWAP ratio comes with a few drawbacks. The majority of issues arise from the fact that a VWAP is a culminative indicator, which means it depends on a large number of data points that will only grow in number over the day. Most traders and investors only utilize one-minute and five-minute periods because having such a huge data set can result in lags in the VWAP line that are similar to moving average lags.


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