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Volume-Weighted Average Price (VWAP): Definition and How Is it Useful?

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Written by Timothy Sykes
Updated 9/16/2023 12 min read

Volume-Weighted Average Price (VWAP) is a technical indicator that measures the average price that stocks and other securities are bought and sold for during the trading day. It forms a trend line by taking volume into account when measuring this number.

I’m a champion of simple trading, but VWAP is one of the indicators I think every trader should know about.

Its importance has a simple reason — other traders watch it. If a stock is trading above VWAP, that means most day traders are making money. If it’s trading below VWAP, that means most day traders are in the red.

As a savvy trader, you’re always looking for that extra edge to enhance your trading strategies. VWAP provides an average price for a security that reflects both its value and how it’s being traded. It’s an insight into the market’s pulse, offering an average price that large buyers and sellers might aim for to maximize their positions while minimizing market impact.

Want to know more about this useful indicator? Read on for examples of how it impacts the markets and traders alike!

What Is Volume-Weighted Average Price or VWAP?

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Volume-Weighted Average Price, commonly known as VWAP, is a trading indicator that provides an average price for a particular security, adjusted according to the amount of shares traded. It’s a potent tool that offers traders, chartists, and investors a more comprehensive picture of a stock’s price action throughout the day.

It’s a type of moving average. Like other indicators of past price action, there’s some lag (but not a lot).

VWAP is just one acronym you need to know to become a fully self-sufficient trader. To further enhance your trading skills, it’s crucial to familiarize yourself with other trading terminologies.

Our comprehensive guide on Trading Terms You Need to Know provides a detailed explanation of the most commonly used terms in the trading world. This knowledge will help you navigate the trading landscape more effectively. Start expanding your trading vocabulary today.

What Does VWAP Indicate?

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VWAP serves as a benchmark, providing valuable information about the trend of a stock. It charts a range of the stock’s overall average sale price during the day.

By looking at VWAP compared to the current asking price, you can see whether a stock is moving in a bullish (upwards) or bearish (downwards) direction.

Why Do Traders Use VWAP?

Traders like VWAP for several reasons. The indicator helps them make informed decisions by providing a single line on their charts that represents the average price.

The general idea with VWAP is that you can assess the current price of the stock in relation to this benchmark, which will help you determine entry and exit points. It can also help you determine whether you want to take an aggressive or more cautious approach toward the trade.

VWAP can help you make a more detailed and confident plan for your trade. It shouldn’t decide your trades, but it can help provide confirmation.

Here are some of the benefits it can offer:

  • VWAP is a simple indicator to use as part of your research.
  • It can help determine entry and exit points for your trade.
  • It can also help you detect a shift in the momentum of the stock.

Here’s what my millionaire student Roland Wolf has to say about VWAP:

“Generally, I like buying stocks over VWAP. I don’t really like buying stocks under VWAP for the most part, unless it’s like a panic dip buy or something like that.”

Calculating VWAP

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Calculating VWAP involves more than just finding the average. It uses both price and volume data, giving more weight to prices with higher trading volume.

Understanding VWAP is useless without a broader framework in technical analysis. Our article on Technical Analysis provides a deep dive into how you can use various indicators, including VWAP, to make informed trading decisions.

Components of the Calculation

VWAP’s formula is calculated using just price and volume. These are the two most important indicators, so that’s a pretty good start…

Steps to Calculate VWAP

Calculating VWAP involves a series of steps.

  • First, multiply the price of each trade by its volume.
  • Then, add these results together…
  • Lastly, divide by the total volume of all trades.

The calculation is done for each price throughout the trading period — typically one day for intraday traders.

Use of Time Periods in the Calculation

Time plays a crucial role in the calculation of VWAP. Typically, traders use one trading day as the standard time frame, which makes VWAP particularly beneficial for day traders.

When the stock reaches its closing price, VWAP stops tracking. It resets the table for the next trading day.

Types of Traders Who Use VWAP

Different types of traders use VWAP for various purposes. Whether you’re a buyer or seller, institutional or retail trader, the VWAP indicator can bring significant value to your trading strategy.

Here’s a recent lesson that my millionaire student Mark Croock gave in my Trading Challenge on using VWAP:

If you want to check this video lesson out — and see all my trades, join a chat room that’s actually collaborative, and access more than 7,000 webinars — apply to my Trading Challenge today!

Intraday Traders

Many intraday traders use VWAP. By providing a benchmark for the day’s trading activity, it gives a quick snapshot of market sentiment.

Institutional Traders

Institutions use VWAP to help guide their trading strategies. They often try to buy below the VWAP and sell above it to achieve better-than-average prices.

Mutual Funds and Hedge Funds

Mutual and hedge funds use VWAP to lessen the market impact of their large orders. They’ll often buy below VWAP — or sell above the VWAP — pushing the price back toward the day’s average.

Retail Traders and Short-Term Traders

Retail and short-term traders use VWAP as an essential part of their analysis and decision-making process. It provides them with an indication of the trend, helping them to make more informed trading decisions.

Benefits of Using VWAP for Trading Stock Prices

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VWAP has several benefits…

More Accurate Price Representation

VWAP, unlike simple moving averages, incorporates volume in its calculations, leading to a more accurate representation of a security’s price.

Reduced Market Impact on Trades

For institutional traders, using VWAP can help reduce the market impact of their large trades. By ensuring their trades are closer to the VWAP, they can limit the price slippage.

How to Trade With VWAP

VWAP offers several strategies for trading, from identifying potential support and resistance levels to setting entry and exit points.

You can take a long or a short approach on a stock using VWAP as part of your supporting research. Which approach you take is determined by various aspects like the stock price, the trend, whether there is a catalyst, and even the time of day.

A robust trading platform with real-time data and advanced charting capabilities is essential for trading with VWAP. Check out our list of the Best Trading Platforms for Day Traders to find a platform that best suits your trading style and needs.

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I use StocksToTrade to scan for news, tweets, earning reports, and more — all covered in its powerful news scanner. It has the trading indicators, dynamic charts, and stock screening capabilities that traders like me look for in a platform. I made sure that it did — I helped design it.

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VWAP acts as a potential support or resistance level. If the price is above the VWAP, it could act as a level of support.

If the price is below VWAP, it can serve as resistance.

Entry and Exit Levels

Traders can use VWAP to help establish entry and exit points. For example, buying when the price is near or below VWAP and selling when the price is above VWAP can be a good strategy.

Gauge Relative Strength

By comparing a stock’s price to the VWAP, traders can gauge the relative strength or weakness of the stock.

Trade VWAP Price Crosses

Traders can look for opportunities when the price crosses VWAP.

When the price crosses above VWAP, it could be a bullish sign, while a cross below could indicate bearish sentiment.

If you want to read more about moving average crosses, check out my Moving Average Guide!

How Can You Interpret A VWAP Indicator?

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Interpreting the VWAP indicator involves understanding its interaction with the stock’s price. A stock trading above its VWAP may suggest a bullish sentiment, while trading below may indicate bearish sentiment.

How to Use the VWAP Indicator

Using the VWAP indicator effectively requires an understanding of its characteristics and purpose.

Traders often use it in combination with other indicators like MACD or Bollinger Bands® to confirm signals and enhance their trading strategies.

Check out my article on MACD here — then learn how to use Bollinger Bands® to identify market trends here!

Key Takeaways

VWAP is an essential tool for traders, providing an average price weighted by volume. It helps in making informed trading decisions, improving entry and exit points, and managing market impact.

It isn’t a silver bullet for your trading plan — but VWAP is one of many topics you should learn as part of your trading education!

Trading isn’t rocket science. If you’re ready to work hard, you CAN become a self-sufficient trader. Trading has changed my life, and I think this way of life should be open to more people…

I’ve built my Trading Challenge to pass on the things I had to learn for myself. It’s the kind of community that I wish I had when I was starting out.

We don’t accept everyone. If you’re up for the challenge — I want to hear from you.

Apply to the Trading Challenge here.

Trading is a battlefield. The more knowledge you have, the better prepared you’ll be.

Do you use VWAP in your trading strategy? Let me know in the comments — I love hearing from my readers!

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Timothy Sykes

Tim Sykes is a penny stock trader and teacher who became a self-made millionaire by the age of 22 by trading $12,415 of bar mitzvah money. After becoming disenchanted with the hedge fund world, he established the Tim Sykes Trading Challenge to teach aspiring traders how to follow his trading strategies. He’s been featured in a variety of media outlets including CNN, Larry King, Steve Harvey, Forbes, Men’s Journal, and more. He’s also an active philanthropist and environmental activist, a co-founder of Karmagawa, and has donated millions of dollars to charity. Read More

* Results are not typical and will vary from person to person. Making money trading stocks takes time, dedication, and hard work. There are inherent risks involved with investing in the stock market, including the loss of your investment. Past performance in the market is not indicative of future results. Any investment is at your own risk. See Terms of Service here

The available research on day trading suggests that most active traders lose money. Fees and overtrading are major contributors to these losses.

A 2000 study called “Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors” evaluated 66,465 U.S. households that held stocks from 1991 to 1996. The households that traded most averaged an 11.4% annual return during a period where the overall market gained 17.9%. These lower returns were attributed to overconfidence.

A 2014 paper (revised 2019) titled “Learning Fast or Slow?” analyzed the complete transaction history of the Taiwan Stock Exchange between 1992 and 2006. It looked at the ongoing performance of day traders in this sample, and found that 97% of day traders can expect to lose money from trading, and more than 90% of all day trading volume can be traced to investors who predictably lose money. Additionally, it tied the behavior of gamblers and drivers who get more speeding tickets to overtrading, and cited studies showing that legalized gambling has an inverse effect on trading volume.

A 2019 research study (revised 2020) called “Day Trading for a Living?” observed 19,646 Brazilian futures contract traders who started day trading from 2013 to 2015, and recorded two years of their trading activity. The study authors found that 97% of traders with more than 300 days actively trading lost money, and only 1.1% earned more than the Brazilian minimum wage ($16 USD per day). They hypothesized that the greater returns shown in previous studies did not differentiate between frequent day traders and those who traded rarely, and that more frequent trading activity decreases the chance of profitability.

These studies show the wide variance of the available data on day trading profitability. One thing that seems clear from the research is that most day traders lose money .

Millionaire Media 66 W Flagler St. Ste. 900 Miami, FL 33130 United States (888) 878-3621 This is for information purposes only as Millionaire Media LLC nor Timothy Sykes is registered as a securities broker-dealer or an investment adviser. No information herein is intended as securities brokerage, investment, tax, accounting or legal advice, as an offer or solicitation of an offer to sell or buy, or as an endorsement, recommendation or sponsorship of any company, security or fund. Millionaire Media LLC and Timothy Sykes cannot and does not assess, verify or guarantee the adequacy, accuracy or completeness of any information, the suitability or profitability of any particular investment, or the potential value of any investment or informational source. The reader bears responsibility for his/her own investment research and decisions, should seek the advice of a qualified securities professional before making any investment, and investigate and fully understand any and all risks before investing. Millionaire Media LLC and Timothy Sykes in no way warrants the solvency, financial condition, or investment advisability of any of the securities mentioned in communications or websites. In addition, Millionaire Media LLC and Timothy Sykes accepts no liability whatsoever for any direct or consequential loss arising from any use of this information. This information is not intended to be used as the sole basis of any investment decision, nor should it be construed as advice designed to meet the investment needs of any particular investor. Past performance is not necessarily indicative of future returns.

Citations for Disclaimer

Barber, Brad M. and Odean, Terrance, Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors. Available at SSRN: “Day Trading for a Living?”

Barber, Brad M. and Lee, Yi-Tsung and Liu, Yu-Jane and Odean, Terrance and Zhang, Ke, Learning Fast or Slow? (May 28, 2019). Forthcoming: Review of Asset Pricing Studies, Available at SSRN: “https://ssrn.com/abstract=2535636”

Chague, Fernando and De-Losso, Rodrigo and Giovannetti, Bruno, Day Trading for a Living? (June 11, 2020). Available at SSRN: “https://ssrn.com/abstract=3423101”