Volume-weighted average price (VWAP) is a financial indicator that measures the average trading price of a security or financial asset traded during a trading session, adjusted for its volume. It is calculated by dividing the total value of a security traded by the total volume of transactions during a trading session. VWAP is used as a benchmark to determine the quality of executions in large orders, and it is often used by institutional investors when making a high-volume trade.
VWAP is displayed as a single line on intraday charts, which looks similar to a moving average line, but smoother. It is 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.
VWAP can be used similar to moving averages, where prices above the VWAP reflect a bullish sentiment and prices below the VWAP reflect a bearish sentiment. It is also a helpful metric for investors with a long-term mindset because of its importance in corporate transactions.
Some common strategies for using VWAP include:
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Benchmark for trade executions: VWAP is used as a benchmark to determine the quality of executions in large orders. For example, if a portfolio manager wants to acquire thousands of shares, but also wants to purchase the position below the average price for the day, the VWAP will usually be the price to beat.
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Timing of buy and sell signals: Some traders use the VWAP to indicate the timing of buy and sell signals for intraday trading.
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Trend indicator: For intraday traders, the VWAP is often used as a trend indicator.
