Volume-Weighted Average Price (VWAP) is a trading algorithm based on a pre-computed schedule to execute a large order to minimize any impact on the market price.
Let’s say you want to buy 15 million shares of Apple (or 1000 BTC) which is almost half its average daily volume. You can’t buy them all at once because this would impact the market and cause the price to rise.
What you need to do is to split the order into small pieces and execute them without impacting the market. Doing this manually would be ludicrous, and that’s where an execution algo like VWAP comes in.
VWAP is also thought of as a measure of the average price at which an asset is traded over a given period of time.
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.
How Institutaions Use VWAP
Many large institutions will use the intraday VWAP (volume-weighted average price) as a fair value point from which they will continue campaigns of accumulation or distribution
This means that if the price is below VWAP and they have an urgent order to buy a certain number of millions of shares in a certain number of days, they would want to buy below VWAP.
But if they fall behind enough on their accumulation campaigns, they might start buying a bit above VWAP to show their hand, or if many do this, they compete for the same VWAP bid.
Many day traders know this and like to make bullish momentum trades when the price diverges above VWAP (or vice versa with bearish trades if it is diverging below VWAP).
FAQs
VWAP is an essential concept in trading, representing the average price a security has traded at throughout a specific period, considering both volume and price. It is calculated by dividing the total dollar amount traded in the security over a designated timeframe by the total volume traded in the same period.
How do you calculate volume weighted average price VWAP? ›
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 closing prices over a certain period (say, 10 days) and then dividing the total by the number of periods (e.g., 10).
How does VWAP algo work? ›
A VWAP-ALGO order attempts to match the Volume-Weighted Average Price (VWAP) in a security, calculated from the time of order placement to the end of the regular session.
Is VWAP a good indicator? ›
Why is VWAP Important? The VWAP indicator is significant for the purposes of its use. It provides a context of the price trend depending on where the stock is trading (above or below) in relation to the VWAP line. A stock trading above the VWAP as the line rises indicates an uptrend and vice versa on a downtrend.
What is the difference between volume weighted moving average and VWAP? ›
VWMA is an N-period moving average of the closing price, weighted by trading volume. VWAP, on the other hand, takes into account high, low, and closing prices and is anchored to a specific session and weighted by trading volume.
How do you manually calculate VWAP? ›
VWAP is calculated using the cumulative total of the price of each trade, multiplied by the volume of that trade, and then divided by total volume traded for the day. A trader can plot VWAP on thinkorswim® charts without using the formula.
How to use VWAP for day trading? ›
For a long entry: We enter into a trade when price closes above the VWAP and we sell when price closes below it. For a short entry: We enter into a trade when price closes below the VWAP and sell when price closes above it.
What is the success rate of VWAP strategy? ›
The Volume Weighted Average Price (VWAP) indicator didn't yield profits for day traders using standard candlestick/OHLC charts, resulting in a 30% win rate.
Is VWAP bullish or bearish? ›
It can indicate if the market is bearish or bullish
The market is bearish when the price is below the VWAP and bullish if the price is above the VWAP.
What is the formula for VWAP in Excel? ›
VWAP = [Cumulative (Price * Volume)]/[Cumulative Volume]
While the formula is quite easy, let us also find out the VWAP application in Excel by going through an example.
Technical traders use the volume-weighted average price indicator to help them find entry and exit points in the market. It also gives them insight into the prevailing market sentiment and trends. Since it uses historical data, it is a lagging indicator.
Should I buy above or below VWAP? ›
General Strategies
If the price is above VWAP, it is a good intraday price to sell. If the price is below VWAP, it is a good intraday price to buy. However, there is a caveat to using this intraday. Prices are dynamic and what appears to be a good price at one point in the day may not be by day's end.
Is VWAP better than EMA? ›
Which is better, VWAP or EMA? Neither is strictly better; the choice depends on what aspect of the market you're focusing on. VWAP is excellent for understanding price in relation to volume, while EMA can help spot trend directions more quickly.
Why is VWAP so important? ›
Volume Weighted Average Price (VWAP) is a top trading indicator that blends price with volume to provide a more comprehensive view of market trends. Its significance lies in its ability to offer a snapshot of both trading momentum and value, making it an indispensable tool for traders and analysts alike.
What are the three lines of VWAP? ›
A triple VWAP indicator plots three VWAP lines on a price chart based on parameters defined by the user. The price above all three VWAP lines indicates a strong bullish trend and momentum. The price below all three VWAP lines indicates a strong bearish trend and momentum.
Which indicator is similar to VWAP? ›
Similar to VWAP, the AVWAP indicator is also used to determine the average price of securities, based on both volume & price. However, unlike VWAP, the starting point (Timeframe) is selected by the user, and the determination of trend is not restricted to Intraday.
Where can I get the VWAP indicator? ›
You can assume a 5-minute chart for the VWAP indicator. To find the VWAP, you need to add the high, low, and close price, then divide by three, multiply this volume for that period, and add the result in the spreadsheet, under the volume column PV. After that, you need to divide PV by the volume for that period.
What is the formula for the weighted average price? ›
To calculate the weighted average cost, divide the total cost of goods purchased by the number of units available for sale. To find the cost of goods available for sale, you'll need the total amount of beginning inventory and recent purchases.
How to calculate 60 day VWAP? ›
The 60-day VWAP calculation will (i) use the daily close price and daily volume as reported on Yahoo Finance, and (ii) be calculated as follows: Daily Close X Daily Volume = Daily Weighted Volume with Total Daily Weighted Volume (60 days) / Total Daily Volume (60 days) , except with respect to the calculation of daily ...
