Traders require insight on both the trend and value of a security. The volume-weighted average price (VWAP) is the yardstick utilized by traders to provide average price security traded for the duration on any given day. The volume-weighted average price has a basis in both volume and price.
Need to Know
- Intraday charts display the volume weighted average price, VWAP, as a single line.
- When the volume weighted average price uptrends, the higher the price above the VWAP.
- Below the VWAP line, a declining line means the price is in a downtrend.
- The historical average is where the volume weighted average price comes from, not the future or present. Relying on the VWAP only is a mistake easily made.
- Investors use the volume weighted average price for a day to assess the amount paid for security. Hint: An investor will overpay if the security remains at a higher rate than the VWAP. The opposite is true when an investor pays less; it means they came out ahead for the day.
Calculating Volume Weighted Average Price
- Investors calculate the VWAP for themselves. The same methods of calculation work every day.
- Examine the first five-minute period of the day. Finding the average price of stocks traded, add the high, low, and close numbers and divide by three. Multiply the amount garnered by the volume for that time frame. Always note the results in a spreadsheet.
- The VWAP value will then come from dividing the PV by the volume for that five-minute time frame.
- Through the duration of a day, continue adding the PV value from every period. Divide the total by the volume up to that point in time. The spreadsheet comes into play, making it easier to create columns that do the math for each day. The cumulative values divide by each other for the total VWAP.
Do Not Trust Volume Weighted Average Price Solely
Again, the volume weighted average price is only for one day time periods. Restarting the calculation process every day keeps an investor from miscalculating average over too many days.
Do not use the VWAP as the only factor when buying security regardless of whether it is above or below the trend lines. No one wants to miss an opportunity because the volume weighted average price drops below the VWAP because of going outside of the single day of trading.
Volume weighted average price is NOT predictive and relies on historical values.
Anyone can day trade and invest in futures and securities. But, even the easiest mechanisms matters. VWAP is a single-day mathematical equation. Do not miss an opportunity by using only it to make decisions.