≡ Menu

Volume Weighted Average Price (VWAP) Explained

Open ZERO Brokerage FREE Share Trading Account - Buy and Sell Stocks Without Brokerage - Set GTT (Good Till Triggered) Orders on System and Forget

This broker does not charge anything for stock buying and selling. You can set GTT (Good Till Triggered) order after buying a stock - the system will sell the stock automatically at your target price even if you are not monitoring the market. Only 25k is blocked for option selling with hedge. Get a lifetime account in Sensibull.com (virtual trading app & strategy builder) fee ₹800.00+GST per month for FREE. It takes 5 minutes to open an account online. Click Here to Open Free Account with Them Today and Join 1+ Crore Investors & Traders>>

The Volume Weighted Average Price (VWAP) is an average price of a stock or asset for a specific period with calculations considering the volume traded at various prices.

Volume-weighted average price (VWAP) is a technical indicator that shows the average price of a financial asset based on its volume and price. It’s calculated by dividing the value of a security by the total volume of transactions during a trading session, and then adjusting the result in real time until the session ends. VWAP is often used in intraday charts, where time frames are set on a minute, second, or hourly basis.

In short, it considers the volume of the stock at different prices to be an indicator or a good price for intraday trading.

It is said that this indicator combines the three most important ingredients of a stock chart, which are price, volume, and time.

The traditional VWAP is calculated over that trading day – starting at the beginning of the day or session.
It is also known as the session VWAP or daily VWAP.

The VWAP originated in 1988 as a way for institutional investors to benchmark the prices they received for their purchases.

Did they end up buying the asset better or worse than the average price – or, in this case, the volume-weighted average price?

VWAP has been adopted by many traders as a technical indicator for entries and exits.

VWAP has been adopted by many traders as a technical indicator for entries and exits. Nowadays even algos are made to trade with VWAP data.

Which Traders use VWAP?

Mostly intraday traders use it in equities, forex and commodities.

TIP: Stock market trading is risky anyway so by trading commodities you are increasing the risk many fold.

Why?

Commodities change their prices too soon, too often and aimlessly. Commodities trading is 100% fluke trading. When you are trading stocks at least you know the fundamentals of the company, the profit and loss, debt, balance sheet etc. However, in Commodities, you have ZERO idea of what will happen in future.

I am not in favour of commodities being traded in stock markets at all – but I am not in the government so the only thing I can do is never trade commodities. I have given you a reason why you shouldn’t trade commodities. Now it is up to you to take my advice seriously or not.

The VWAP is used by many day traders (in equities, forex, or futures) on shorter intraday time frames.

Using VWAP To Determine Bullish Or Bearish

For most traders, if the price is above VWAP, there is bullish sentiment and if the price is below VWAP, there is bearish sentiment in the markets. So if the price is above VWAP – they will buy the stock and if the price is below VWAP – they will short the stock.

Day or short-term traders both follow the above rule.

What do longer time frame investors do?

Longer time frames mean 3 to 6 months. These investors are looking for 10-18% returns. These investors along with the above rule on VWAP also look at the 200-day moving average to determine whether to buy or sell.

TIP: Moving averages of 100 or 200 days are in my experience a very good indicator to guess the stock’s future move at least for the short term (2-3 months).

Moving averages are more common than the VWAP method. Moving averages are far more simple to understand and easy to calculate. Nowadays there are many websites/apps available which calculate some basic technical analysis of companies including moving averages. You can use them to make a trading decision.

Slope Of The VWAP

The slope of the VWAP line is important. If it is sloping up, the average price is increasing. If it is sloping down from left to right, then the price is generally moving lower. If the VWAP is horizontal, price action is choppy and generally moves sideways.
Horizontal VWAP is very difficult to trade because it does not give any idea of buying or shorting.

Some traders may take a mean reverting trade (contradictory trade) – this is exactly the opposite of the trade idea written above.
This is the mean reverting trade – if the price is above VWAP traders think that with time the stock price will revert to VWAP – therefore they are short. Similarly, if the price is below VWAP – traders think that with time the stock price will revert to VWAP – therefore they buy.

Using VWAP As Support And Resistance

Like major moving averages, the VWAP can sometimes act as support and resistance.

A trader waiting for trades to go long would have found good entries when the price pulled back to VWAP, which acted as support; then, put stops below VWAP.

Frequently Asked Question

Q – Who invented the VWAP?
A – It is believed to have been invented by mathematician Paul Levine.

Q – Why is VWAP more popular than moving average?
A – The typical moving average (such as the 50-period moving average or the 200-period moving average) does not consider volume. The VWAP uses volume, meaning that every stock share has a vote in determining the VWAP value.

Q – Do institutional trading algorithms use the VWAP?
A – Yes, a good percentage of them do.

Q – How is VWMA different from VWAP?
A – Volume-weighted moving average (VWMA) fundamentally differs from volume-weighted average price (VWAP). While VWMA does incorporate the volume of shares into its calculation, it is still more like the traditional moving average, such that the oldest data is dropped when new data comes in.

VWAP is different in that it never drops off any data once it starts picking up data from its anchor point. It is a cumulative average price instead of a rolling average price.

If you have any questions, please leave a comment below.

Disclaimer: The information above is for educational purposes only and should not be treated as investment advice. Any reader interested in this strategy should do their research and seek advice from an authorized financial advisor.




TheOptionCourse.com © Copyright Since 2013 ® All Rights Reserved

Click to Share this website with your friends on WhatsApp


COPYRIGHT INFRINGEMENT: Any act of copying, reproducing or distributing any content in the site or newsletters, whether wholly or in part, for any purpose without my permission is strictly prohibited and shall be deemed to be copyright infringement.

INCOME DISCLAIMER: Any references in this site of income made by the traders are given to me by them either through Email or WhatsApp as a Thank You message. However, every trade depends on the trader and his level of risk-taking capability, knowledge and experience. Moreover, stock market investments and trading are subject to market risks. Therefore there is no guarantee that everyone will achieve the same or similar results. My aim is to make you a better & disciplined trader with the stock trading and investing education and strategies you get from this website.

DISCLAIMER: I am NOT an Investment Adviser (IA). I am an Authorized Person (AP) of a Stock Broker. I do not give tips or advisory services by SMS, Email, WhatsApp or any other forms of social media. I strictly adhere to the laws of my country. I only offer education for free on finance, risk management & investments in stock markets through the articles on this website. You must consult an authorized Investment Adviser (IA) or do thorough research before investing in any stock or derivative using any strategy given on this website. I am not responsible for any investment decision you take after reading an article on this website. Click here to read the disclaimer in full.


Disclaimer | Privacy Policy | About Me | Conservative Option Course
Find 200+ testimonials of my course:
What Traders Say About This Course

My student gets the Winner's Certificate of Zerodha 60-day Challenge - Click here and Open Stock Buy and Sell Free Account with Them Today!!!

Open ZERO Brokerage FREE Share Trading Account - Buy and Sell Stocks Without Brokerage - Set GTT (Good Till Triggered) Orders on System and Forget

Traditional brokers charge a lot for brokerage; however, this broker does not charge anything for stock buying and selling. Also, you can set GTT (Good Till Triggered) order after buying a stock, so that the system can sell the stock automatically at your target price even if you are not monitoring the market. Only 25k is blocked for option selling with hedge. Also, you get a lifetime free account in Sensibull (virtual trading app & strategy builder) which charges Rs.800/-+GST a month. It takes 5 minutes to open an account online. Click here and Open Free Account with Them Today >>

About the author: Dilip Shaw I started trading stock markets since 2007. However my first 3 years were losses. Then I dedicated almost 1 year on studying, researching, paper trading options and learned a lot in that time. Since 2011 I am trading Nifty options profitably. Call me if you need any help trading options on 9051143004.

{ 2 comments… add one }
  • Farooq May 7, 2024, 4:01 pm

    What is best Time Frame for Intraday trading using VWAP

    • Dilip Shaw May 14, 2024, 12:05 pm

      15-minute VWAP is good when trading intraday to illustrate the trend.

Leave a Comment

Menu