Volume Weighted Average Price (VWAP)

What it is and how to use it

What is it?

The Volume Weighted Average Price (VWAP) is a trading benchmark representing the average price a security has traded at throughout the day, based on both volume and price. VWAP provides a more accurate representation of the average price by weighing it according to the volume of trades. This makes it particularly useful for understanding the true average price over a specified period.

Who made it?

The concept of VWAP has been widely used in financial markets, particularly by institutional traders. It is not attributed to a single creator but has become a standard tool for traders looking to assess the average price level of a security.

How is it calculated?

The formula for VWAP is:

VWAP = sum(volume[i] * price[i]) / sum(volume[i])

Where:

• price[i] is the typical price for each period (calculated as (high + low + close) / 3).

• volume[i] is the volume for each period.

Code (ProRealTime)

How do you use it?

Volume Weighted Average Price can be used in several ways:

Benchmark for Trades:

VWAP is often used by institutional traders to ensure they execute large orders at a fair price. Trading above the VWAP can indicate a strong uptrend while trading below it can indicate a downtrend.

Intraday Indicator:

It is primarily used as an intraday indicator to provide traders with a reference point for the day's trading session. It helps you assess the current price relative to the average price, weighted by volume.

Support and Resistance:

VWAP can act as a dynamic support and resistance level. Prices often tend to gravitate towards the VWAP during the trading day.

FAQ

Q: What are the best settings for VWAP?

A: VWAP is typically used as an intraday indicator, so it resets at the beginning of each trading day. There's no need to adjust settings; just use it to compare the current price to the average price based on volume.

Q: Is VWAP good for day trading?

A: Yes, VWAP is excellent for day trading. It helps you see the average price of a security based on volume, providing a benchmark for intraday trading.

Q: How can VWAP be used to improve trading?

A: VWAP helps you identify whether a security is trading above or below its average price, providing potential entry and exit points. It's also useful for confirming trends and spotting reversals.

Strategies using VWAP

• None so far.