What is the VWAP Indicator?

The Volume Weighted Average Price (VWAP) indicator is a technical analysis tool used to identify the average price of a security, weighted by trading volume. In simpler terms, it reveals the average price at which a security has traded during a specific period, considering the volume of trades for each price point.

How VWAP Works

VWAP calculates the average price by multiplying the price of each trade by its corresponding volume and dividing the sum by the total volume traded. This means that trades with higher volumes have a greater influence on the VWAP than trades with lower volumes.

Practical Applications of VWAP

VWAP is a versatile tool with several practical applications in trading:

• Identifying trends: VWAP can help traders identify the direction of a trend. When the price of a security is above the VWAP, it suggests an upward trend, and vice versa.
• Finding entry and exit points: Traders can use VWAP as a reference point for entering and exiting trades. For example, buying when the price breaks above VWAP or selling when it falls below it.
• Measuring price action: VWAP can help traders assess the strength of price movements. A significant deviation from VWAP suggests a strong move in the market.

Example

Let's say a stock has the following trades during a day:

To calculate the VWAP for this period:

1. Multiply each price by its corresponding volume:
   • 100 * 100 = 10,000
   • 102 * 200 = 20,400
   • 101 * 300 = 30,300
2. Sum the products: 10,000 + 20,400 + 30,300 = 60,700
3. Sum the total volume: 100 + 200 + 300 = 600
4. Divide the sum of products by the total volume: 60,700 / 600 = $101.17

This means the VWAP for the day is $101.17.

Conclusion

VWAP is a valuable tool for traders who want to understand the average price of a security and use that information to make informed trading decisions. It provides a clear picture of the overall price action, helping traders identify trends and potential entry and exit points.