VWAP definition (2024)

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What is VWAP?

VWAP is the abbreviation for volume-weighted average price, which is a technical analysis tool that shows the ratio of an asset's price to its total trade volume. it provides traders and investors with a measure of the average price at which a stock is traded over a given period of time.

VWAP is commonly used as a benchmark by investors who want to be more passive in the market - usually pension funds and mutual funds - and traders who want to ascertain whether a stock was bought or sold at a good price.

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.

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Pros and cons of VWAP

Pros of VWAP

VWAP ratios are used in algorithmic trading to help traders and investors to determine the best price at which to buy or sell, in line with the volume of the market. By ensuring high liquidity, traders can usually expect lower transaction costs and best execution.

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.

Cons of VWAP

There are a few issues associated with using the VWAP ratio. Most of the problems stem from the fact a VWAP is culminative indicator, meaning it relies on a vast amount of data points that will only increase in quantity throughout the day. Having such a large data set can cause lags in the VWAP line, in a similar way to moving average lags, which is why most traders and investors only use one-minute timeframes.

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FAQs

What does the VWAP tell you? ›

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.

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Is VWAP a good or bad 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.

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Why is VWAP so important? ›

It's a trading benchmark that represents the average price a security has traded at throughout the day, based on both volume and price. VWAP is important because it provides traders with pricing insight into both the trend and value of a security.

How does a 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. VWAP takes into account historical and current volume distributions to adjust the speed of execution.

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How do I use VWAP in trading view? ›

Setting up Anchored VWAP in Tradingview

You'll start by selecting it from the drawing tools in the sidebar: Next, you pick the spot/time you want the Anchored VWAP to start and then click on that area. This will place the start of Anchored VWAP at that spot. In the chart below, that point is denoted by the arrow.

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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.

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What is the best VWAP strategy? ›

For intraday trading, the best way to use VWAP is by initiating a buy order when the price falls below it and executing a sell order when the price rises above. Given that prices are subject to fluctuation during the day, vigilant monitoring of these changes is crucial for successful trading.

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What is the success rate of VWAP? ›

VWAP Backtesting Results

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.

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Where to anchor VWAP? ›

Technical Level Anchoring: Traders can anchor the VWAP to technical levels such as the highest high, lowest low, highest volume, recent gap, or Blue Raindrop. These levels provide a reference point that can help identify support and resistance areas and gauge market sentiment.

Is VWAP indicator free? ›

You can use the following steps to calculate the free VWAP indicator: Calculate the stock's average price by considering the prices of the first 5-minutes of the trading day. You can do this by adding the stock's high, low, and close prices during the time frame and then dividing it by 3.

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What are the most common trading algorithms? ›

Three of the most commonly used trade execution algorithms are Time Weighted Average Price (TWAP), Volume Weighted Average Price (VWAP) and Percent of Value (PoV).

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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.

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How to interpret anchored VWAP? ›

Anchored VWAP is a variation of the VWAP indicator that uses a specific time and price level as an anchor point, or starting point, rather than the beginning of the current session or trading day. The anchor point can be a significant high or low point in the price action, a pivot level, or any other point of interest.

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What is the difference between VWAP and closing price? ›

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.