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.
