What is VWAP?
VWAP is the abbreviation Volume Weighted Average Price. It is a
trading standard used by the dealers and analysts. This value gives the average
price of a stock traded throughout the day, based on its price and volume of
stocks traded. It is very important as it provides the insight of the present
trend and the security value.
VWAP is equal to totaling the money traded for every transaction (price per stock X number of traded shares) and dividing this value by the total number of shares traded.
Volume Weighted Average Price
VWAP indicator to the stock chart will illustrate the calculations for you. Follow these steps and get the calculative results as per the intra-day time frame.
- Find out the average price on which the stock traded over the first-five-minute period of the day. Add the highest value, lowest value and closing value, and then divide the resultant by 3. Multiply this number by the volume for that particular period. The result can be further recorded in the spreadsheet under PV column.
- Divide PV by the volume of that particular period. This will give the value of VWAP.
- VWAP value can be maintained throughout the day by continuously adding the PV up to that particular point. It will become easy to understand in a spreadsheet by creating separate columns for cumulative PV and volume. These values are divided by each other to get the final VWAP.
What does VWAP tell you?
Large commercial stock buyers and mutual fund analysts make use of VWAP ratio to get into or out of the stocks without making a huge market difference. Whenever it is possible, the purchase below VWAP and sale above the levels is preferred. This pushes the price lower from the average value, instead of getting away from it.
Retail traders use VWAP to know about the moving average. When the price is over VWAP, they aim at initiating the long positions and with lower VWAP, they gain only short positions.
Difference between Volume Weighted Average Price (VWAP) and Simple Moving Average
These points may appear similar on the charts but VWAP and simple moving average indicate different things. VWAP is the sum of price multiplied by the volume and divided by the total volume of stocks traded. On the other hand, a simple moving average is the sum of closing prices over a certain period of time (days).
Key points to note:
- VWAP and moving average might look the same on the charts but understanding their difference to comprehend the points in the right way is essential.
- The rise in VWAP comprehends to the uptrend in the stock pricing.
- The declining VWAP comprehends to the downtrend in the stock pricing.
- Trends can’t be exactly determined by VWAP and it can only give you an idea of the past and present values but can’t predict the future.
The investors might make use of VWAP for assessing the price they’ve paid for security throughout the day. At the end of the day, if the price is less than VWAP, the shares purchased were at a good price and if it is higher than VWAP, the shares were overpaid.