Importance of Volume Weighted Average Price

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The VWAP tells us about the real average price of the stock. This indicator is like the moving average, which works on historical data and makes the decision process easier in intraday trading. A VWAP is a popular tool among investors. Some of the advantages of VWAP are as follows:

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    This indicator is better than the moving average

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    It can indicate a bullish or bearish trend

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    You can use this indicator for long and short positions

How to Calculate VWAP?

How to Calculate VWAP?

The calculation starts with the market opening bell and ends with the closing bell. As the VWAP is an intraday indicator, intraday data is used to calculate it.

Today, thanks to technological advancements, you can straight away add any popular technical indicator like the VWAP to a price chart with a few clicks. That said, the following section will get into the details of how to calculate the VWAP manually.

The mathematical formula to calculate the volume-weighted average price is: VWAP = Typical Price*Volume/Cumulative Volume

Example of VWAP

In the above equation, the typical price is the average of the high price, the low price, and the closing price. You can calculate it by using the formula: Typical Price (TP) = high price + low price + closing price/3

To get a better understanding of the calculation, let us look at an example. Let's assume the high price = 20, low price = 10, and the average closing price = 15. Then, applying the typical price formula, we get: TP = 20+10+15/3 = 15

Then, multiply the TP by the volume, so let us assume the volume of the period is (V) = 20 Therefore, TP*V = 300

Cumulative volume for the stock, which in this case, let us assume is = 75 So, VWAP = TP*V/CV = 300/75 = 4

One can calculate the VWAP for every period, which will result in the formation of a VWAP curve on the price chart.

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Frequently Asked Questions on VWAP (FAQs)

Generally, many traders using the VWAP indicator may consider taking long positions if the price below the VWAP cuts above it. However, there is no certainty that the price is going to shoot up and meet your target. There is always a chance it may see a reversal, so have a risk-management strategy in mind.

Nowhere does it say that you have to limit yourself to one technical indicator. You can refer to a single indicator or to multiple technical indicators before placing your trade, so find out what works best for you.

If you wish to implement another indicator besides the VWAP, you can consider using momentum indicators like MACD or the RSI.

Besides price, VWAP also considers the factor of volume, which is why it gives more weightage to those price points with higher volumes. Hence, traders get a clear picture of the price action. In contrast, moving averages do not factor in the volume at any given point.

No, the opening price does not influence the VWAP unless it is the lowest or highest price of the day.

VWAP is a lagging technical indicator. The VWAP qualifies as a lagging indicator since its calculation is based on historical data.
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