Volume-Weighted Average Price (VWAP)
What Is the Volume-Weighted Average Price (VWAP)
Volume-Weighted Average Price (VWAP) is exactly what it sounds like: the average price weighted by volume. VWAP equals the dollar value of all trading periods divided by the total trading volume for the current day. The calculation starts when trading opens and ends when it closes. Because it is good for the current trading day, intraday periods and data are used in the calculation.
Tick versus Minute
Traditional VWAP is based on tick data. As you can imagine, there are many ticks (trades) during each minute of the day. Active securities during active periods can have 20–30 ticks in one minute alone. With 390 minutes in a typical stock exchange trading day, many stocks end up with well over 5000 ticks per day. Over 5000 stocks are traded every day, and these ticks start adding up exponentially. Needless to say, tick data is very resource-intensive.
Instead of VWAP based on tick data, StockCharts.com offers intraday VWAP based on intraday periods (1, 5, 10, 15, 30, or 60 minutes). Note that VWAP is not defined for daily, weekly, or monthly periods due to the nature of the calculation (see below).
How To Calculate VWAP
There are five steps involved in the VWAP calculation. First, compute the typical price for the intraday period. This is the average of the high, low, and close: {(H+L+C)/3)}. Second, multiply the typical price by the period's volume. Third, create a running total of these values. This is also known as a cumulative total. Fourth, create a running total of volume (cumulative volume). Fifth, divide the running total of price-volume by the running total of volume.
The spreadsheet example below shows one-minute VWAP for the first 30 minutes of trading in IBM. Dividing cumulative price volume by cumulative volume produces a price level adjusted (weighted) by volume. The first VWAP value is always the typical price because volume is equal in the numerator and the denominator. They cancel each other out in the first calculation.
The chart below shows one-minute bars with VWAP for IBM. For the first 30 minutes of trading, prices ranged from $127.36 on the high to $126.67 on the low. It was a volatile first 30 minutes. VWAP ranged from 127.21 to 127.09 and spent its time in the middle of this range.
Characteristics of VWAP
Like moving averages, VWAP lags price because it is an average based on past data. The more data there is the greater the lag. A stock has been trading for some 331 minutes by 3:00 PM. As a cumulative “average,” this indicator resembles a 330-period moving average. That is a lot of past data.
The one-minute VWAP value at the end of the day is often close to the ending value for a 390-minute moving average. Both moving averages are based on the one-minute bars for that day. At the close, both are based on 390 minutes of data (one full day). You cannot compare the 390-minute moving average to VWAP during the day though. A 390-minute moving average at 12:00 PM will include data from the previous day. VWAP will not. Remember, VWAP calculations start fresh at the open and end at the close. 150 minutes of trading have elapsed by 12:00 PM. Therefore, VWAP at 12:00 PM would need to be compared with a 150-minute moving average.
Despite this lag, you can compare VWAP with the current price to determine the general direction of intraday prices. It works like a moving average. In general, intraday prices fall when below VWAP and rise when above VWAP. VWAP will fall somewhere between the day's high-low range when prices are range-bound for the day.
The next three charts show examples of flat, rising, and falling VWAP.
How To Use VWAP
VWAP is used to identify liquidity points. As a volume-weighted price measure, VWAP reflects price levels weighted by volume. This can help institutions with large orders. The idea is not to disrupt the market when entering large buy or sell orders. VWAP helps these institutions determine the liquid and illiquid price points for a specific security over a very short time.
VWAP can also be used to measure trading efficiency. After buying or selling a security, institutions or individuals can compare its price to VWAP values. A buy order executed below the VWAP value would be considered a good fill because the security was bought at a below-average price. Conversely, a sell order executed above the VWAP would be deemed a good fill because it was sold at an above-average price.
Anchored VWAP
While traditional VWAP starts at the first bar of the day and ends at the last bar of the day, Anchored VWAP allows you to choose your starting bar. The overlay typically starts at a significant high or low, earnings announcement, or some other indicator of a change in market psychology. This way, VWAP is calculated using only price action since the significant event occurred.
Because you're choosing the starting bar and the ending bar is the most recent bar available, Anchored VWAP can span multiple days. Since this version of the overlay is not confined to a single trading day, Anchored VWAP can be used on daily and intraday charts.
Learn More. Anchored VWAP
The Takeaway
VWAP serves as a reference point for one day's prices. Because of this, it's best suited for intraday analysis. Chartists can compare current prices with the VWAP values to determine the intraday trend. VWAP can also be used to determine relative value. Prices below VWAP values are relatively low for that day or that specific time. By contrast, prices above VWAP values are relatively high for that day or that specific time. Remember that VWAP is a cumulative indicator, which means the number of data points progressively increases throughout the day. On a one-minute chart, IBM will have 90 data points (minutes) by 11:00 AM, 210 data points by 1:00 PM, and 390 data points by the close. The number dramatically increases as the day extends. This is why VWAP lags price, and this lag increases as the day extends.
Using with SharpCharts
Volume-Weighted Average Price (VWAP) can be plotted as an “overlay” indicator on Sharpcharts. After entering the security symbol, choose an intraday period and a range. This can be for one day or “fill the chart.” If you want more detail, choose “fill the chart,” and if you want general levels, choose one day.
VWAP can be plotted over more than one day, but the overlay will jump from its prior closing value to the typical price for the next open as a new calculation period begins. Also, note that VWAP values can sometimes fall off the price chart. VWAP at 45.50 will show up on a chart with a price range from $45.80 to $47. You may sometimes need to extend the range to a full day to see VWAP on the chart. The VWAP value is always displayed at the top left of the chart.
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