Volume Weighted Average Price

Understanding the Volume Weighted Average Price (VWAP)

The Volume Weighted Average Price also known as VWAP, is a trading term every trader should understand. For trading beginners, the term might be complex but don't worry, we're going to break it down in a simple way.

What is the Volume Weighted Average Price?

The Volume Weighted Average Price (VWAP) is a very vital tool used primarily by traders. What it does, it measures the average price a security has traded at throughout the day, based on both volume and price. It's important in trading because it provides traders with insight into both the trend and value of a security.

Why is VWAP important?

For anyone trading in the stock market, the VWAP comes in handy. It serves as a benchmark used by traders that gives a true average price of a stock over a specified time frame. It tells you at what price most trading activity took place and is thereby a useful indicator of the market trend.

How is VWAP calculated?

Curious about how VWAP is calculated? It's actually a two-step process. First, calculate the typical price for the security which is the high price, low price and closing price divided by three. Second, multiply the typical price by the volume, then divide by the total shares bought / sold for the day. Despite sounding complex, most trading platforms will calculate this for you.

Using VWAP in your trading strategy

Volume Weighted Average Price should never be used in isolation; rather, it's best used in combination with other trading strategies. For example, traders may find it beneficial to consider VWAP alongside moving averages or price action analysis.

To sum it up…

So there you have it! The VWAP is a valuable tool for traders. It offers a measure of the average price at which a stock has been traded, which can help to identify trends and make informed trading decisions. Whether you are a beginner in the stock market or an expert, understanding the VWAP is important.