Volume-Weighted Average Price

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The Volume-Weighted Average Price (known more commonly by the acronym "VWAP") is the ratio of the value of a traded security to that security's total volume traded over a particular time period. It is a means to determine a security's average trading price during a set time, taking into consideration both the price and the number of shares being traded.[1]

VWAP Formula

(total value traded) / (total volume traded)

where total value traded is the dollar sum of all transactions during the period of measurement, and total volume traded is the total number of shares traded in those transactions.

The period of measurement can be any interval. Brokerages that offer clients the ability to buy and sell at VWAP prices often have a short interval, e.g. one minute windows.[2] The interval can be longer or shorter to suit other technical analysis purposes (e.g. hourly, daily, weekly, monthly, etc).[3]

VWAP Example

A brokerage accepts buy orders for a stock based on a one-minute VWAP. During a one-minute period, three transactions take place:

  • 100 shares traded at $25.00, for a dollar value of $2,500
  • 3000 shares traded at $25.10, for a dollar value of $75,300
  • 1000 shares traded at $25.15, for a dollar value of $25,150

The total dollar value of the shares traded was $102,950. The total number of shares traded was 4,100. The VWAP is $102,950 / 4,100 or $25.11 (rounded up) for that minute of time.

VWAP uses

VWAP is sometimes used as a trading benchmark, allowing traders to measure the effectiveness of their order execution over time by comparing their own fill prices against the average price for the volume. Traders employing technical analysis may create a variety of trading strategies based on the VWAP's relationship to other price measurements.[4] VWAP algorithms were the nearly universal equity execution algorithms used in the early days of algorithmic trading.[5]

References

  1. VWAP. Reuters Financial Glossary.
  2. Volume Weighted Average Price (VWAP) Orders. Interactive Brokers.
  3. Chase The Gap, Or Wait For VWAP?. AlphaTrends.
  4. VWAP Strategies. Ananth Madhavan.
  5. New World Order for Algorithms. The Trade News.
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