Volume-weighted average price (VWAP)
What is VWAP?
What does “VWAP” stand for? The VWAP definition is as follows: volume-weighted average price, also known as the VWAP, is a trading indicator that gives the average price at which a security has traded throughout the day.
It is a technical analysis tool based on both price and volume. This indicator is used by investors to compare the current price of a stock to a benchmark to make informed decisions on when to enter or exit the market.
The VWAP is based on historical values and does not have predictive qualities or calculations. The main idea behind employing a VWAP trading target is to ensure that an investor executes their order in-line with the volume of the market. This tool is important for traders as it offers insight into both the trend and the value of a security.
The VWAP is represented by a basic line on a chart. When the price is above the VWAP line, it means that the asset is likely in an uptrend. Conversely, when it’s below the VWAP, the price is likely in a downtrend.
When determining a trend, it is important not to rely on VWAP exclusively, as it only represents a historical average, without reflecting the present or the future of a market.
Where have you heard about VWAP?
You’ve probably heard of the VWAP meaning before. The indicator is loved and used by many investors and traders, as it can help evaluate the price they paid for a security throughout the day. At the end of the day, if an investor bought the asset at a price below the VWAP line, then they bought at a good price. If they entered above the VWAP, then they may have overpaid.
In 1984, the first implementation of the VWAP was done for the Ford Motor Company by James Elkins, head trader at Abel Noser.
What you need to know about VWAP…
The VWAP can be used similarly to the moving average. On a chart, these two indicators may even look alike. However, they calculate different things.
Wonder what does the VWAP formula look like? Here is how it is calculated:
The VWAP is calculated for each day, using intraday price data. It starts when the markets open and ends when the markets close. As such, it is best suited for intraday analysis. Analysts can compare current prices with the VWAP values to determine the intraday trend.
Today, most trading platforms allow plotting the VWAP indicator on a chart online, performing all the calculations for you automatically.
Prices above the VWAP represent a bullish sentiment, whereas prices below the VWAP represent a bearish sentiment. Traders may hold a long position as the price moves above the VWAP or open a short position as the price moves below VWAP.
The indicator is one of the most useful tools for day traders, as it gives a good idea of whether traders who recently initiated positions are gaining or losing money on their trades.
Institutional buyers usually use this indicator to plan entries and open larger positions without ending on the “wrong side” of the price. Moreover, the VWAP can assist in devising an approach to a stock and making the right decision at the right time. Retail traders also use the indicator as a trend confirmation tool.