The volume-weighted average price (VWAP) measures a stock's average price during a time period, adjusted for volume. The metric is important for technical analysis and corporate transactions and gives insight into a stock's trend and value.
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What is it?
What is volume-weighted average price (VWAP)?
A stock's volume-weighted average price (VWAP) is its average price during a trading day, adjusted for volume. It's similar to a moving average used in technical analysis. However, it gives more weight to larger trades and provides a more even view of a stock's price during a trading day.
The VWAP formula is: VWAP = Typical price x Volume / Cumulative volume
Instead of calculating all the trades made during the day, VWAP uses the typical price in the period. The formula for typical price is: (High price + Low price + Closing price) / 3
Why is it important?
Why is volume-weighted average price (VWAP) important?
The volume-weighted average price (VWAP) helps provide insight into a security's pricing trend and value. Combining price with volume can provide a truer average price for a stock. That makes it a better gauge of its value than the closing price, which might be skewed by a lack of volume.
Many stock traders use VWAP to determine intraday pricing trends to decide when to buy or sell a security. Institutional investors will also use VWAP when making a high-volume trade. They'll aim to buy or sell a security near its VWAP to move a heavy volume in a series of trades without having a big impact on the stock price since it aligns with demand.
VWAP is also an important metric used in corporate transactions because it shows an unaffected price over a period of trading days. For example, companies will also use VWAP when completing an accelerated share repurchase (ASR) program. In addition, when noting a premium offered on an acquisition, an acquiring entity will often cite the VWAP of their target's stock price over the past 20 or 30 trading days. Finally, other corporate transactions will use VWAP to determine the trigger price of an earnout provision, which is common in a merger agreement with a special purpose acquisition company (SPAC).
How to use VWAP
How to use volume-weighted average price (VWAP)
VWAP is typically used to determine the demand for a security. Short-term stock traders will use a stock's VWAP trend to see if money is moving into or out of a security. If the stock's current price doesn't reflect its VWAP, that could indicate an opportunity for a trade.
VWAP can also be a helpful metric for investors with a long-term mindset because of its importance in corporate transactions. For example, it helps companies more accurately reflect the premium they're offering on an acquisition compared to its recent trading price, which might have moved based on rumors or speculation that a deal was forthcoming.
It can also help prevent any manipulation of a stock-based earnout. By basing the earnout or warrant redemption on a stock's VWAP, it ensures that a security has genuinely reached the specified price to trigger the action.
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Examples
Examples of VWAP in action
Long-term investors typically see VWAP mentioned in merger agreements or when a company authorizes an ASR. For example, in 2022, Guess (GES 1.16%) entered into an ASR agreement to repurchase $175 million of its stock. Under the agreement, the company paid $175 million for its shares. Guess noted in a press release that it would determine the final number of shares repurchased based on the VWAP of its share price during the term of the ASR.
In another example, Public Storage (PSA 1.45%) offered to acquire rival self-storage REIT Life Storage (NYSE:LSI) in an all-stock deal valued at $11 billion. Public Storage noted that the exchange ratio represented a 19% premium to the 20-day trailing VWAP of both companies' stocks.
Matthew DiLallo has positions in Public Storage. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
FAQs
The volume weighted average price helps compare the current price of the stock to a benchmark, making it easier for investors to decide when to enter and exit the market. Also, the VWAP can assist investors in determining their approach towards a stock (active or passive) and make the right trade at the right time.
What is VWAP in simple words? ›
The volume-weighted average price (VWAP) is a technical analysis indicator used on intraday charts that resets at the start of every new trading session. It's a trading benchmark that represents the average price a security has traded at throughout the day, based on both volume and price.
What is the difference between VWAP and weighted moving average? ›
VWAP is calculated based on volume, while Moving Averages are calculated based on price. VWAP is more sensitive to volume spikes, while Moving Averages smooth out price data. VWAP is typically used for short-term analysis, while Moving Averages are used for longer-term analysis.
Is VWAP a good indicator? ›
Put simply, VWAP gives traders insight into how a stock trades for that day. For some analysts, it determines a good price at which to buy or sell. It's important to note that the VWAP is a lagging indicator because it is based on historical data.
Is VWAP bullish or bearish? ›
Importance of Volume Weighted Average Price
When the price is below the VWAP, it indicates a bearish market, whereas a price above the VWAP signifies a bullish market. In a bullish market, buying pressure increases, and the chart's trend line moves upward.
Why is VWAP important? ›
VWAP is particularly useful when trading large numbers of shares. Attempting to buy a large volume of a single stock on the market could artificially increase its price — by using VWAP, traders can ensure that they aren't overinflating the trading volume for the asset they want to buy.
What is the VWAP method of trading? ›
VWAP (Volume-Weighted Average Price) trading strategy is a method used by traders to execute trades at prices that closely match the average price traded throughout the day, taking into account both volume and price.
Is VWAP good for swing trading? ›
If price is trading above VWAP and comes back to it, a short-term trader might look for it to act as support. If price is trading below VWAP and trades back up into it, a short-term trader might look for it to act as resistance. Swing and position traders use the VWAP in the same way as a moving average.
Is trading above VWAP good? ›
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.
What does VWAP look like? ›
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.
Unlike the traditional Volume Weighted Average Price (VWAP), which resets daily and provides the average price of a security within a single trading day, the Anchored VWAP provides a more flexible view by allowing traders to set an anchor point from which the calculation begins.
Should I buy above or below VWAP? ›
Applying the VWAP
They might go long only when the price is below the VWAP and short when the price is above VWAP. This filter would be based on the point of view that benchmark-beating buyers are more likely to create support when the price is below VWAP, than when it is above it.
What is the best indicator to combine with VWAP? ›
Combining VWAP with Other Indicators
Integrating VWAP with other technical indicators, such as moving averages or RSI, can provide a more nuanced view of the market. This combination allows traders to validate their trading signals, reducing false positives and improving overall strategy performance.
What is the success rate of VWAP? ›
VWAP Backtesting Results
Applying VWAP in 5-minute day trading alongside a Heikin Ashi chart delivered outstanding success, outperforming 93% of stocks with a buy-and-hold strategy. Despite a modest 29% win rate, the 4.1 reward/risk ratio translated into success across almost all stocks.
How does VWAP strategy work? ›
VWAP is the average price of a stock weighted by volume. By monitoring VWAP, a trader might get an idea of a stock's liquidity and the price buyers and sellers agree is fair at a specific time. The VWAP indicator can be used by day traders to monitor intraday price movement.
What is the VWAP based strategy? ›
A VWAP (Volume Weighted Average Price) trading strategy involves executing trades based on the average price weighted by trading volume over a specific time frame. In trading, making a decision based on solid information can mean the difference between profit and loss.
How do you use VWAP strategy? ›
If the price drops above the VWAP line, a trader can consider taking a long position. In comparison, when the price breaks under the VWAP line, a trader may consider taking short positions. Depending on whether the price is above or below the line, the line can also act as a support or resistance line.
What is the VWAP trading strategy algorithm? ›
The VWAP strategy attempts to match the volume weighted average price over a given period of time. $It works by distributing an order over a specified time based on historical trading volume patterns. Volume constraints are available. TWAP aims to execute trades evenly over a specified time period.
