Volume Weighted Average Price (VWAP)
What is volume weighted average price (VWAP)?
VWAP is a popular technical indicator that is used by traders and investors to help analyze the trend of a stock's price. It is a moving average that takes into account both the price and volume of trades over a given period of time. VWAP is often used as a benchmark for traders to determine if they are buying or selling at a fair price.
How does VWAP work?
The VWAP is calculated by adding up the total value of trades over a given period of time and dividing by the total volume of trades during that same period. This creates a weighted average that takes into account the impact of volume on the price. The VWAP is often calculated over the course of a trading day, but it can also be calculated over shorter or longer periods of time.
Traders use the VWAP as a reference point for determining whether a stock is overbought or oversold. If the current price of the stock is above the VWAP, it may be considered overbought and traders may look to sell. Conversely, if the current price is below the VWAP, the stock may be considered oversold and traders may look to buy.
VWAP trading strategies
One strategy for using the VWAP is to combine it with other technical indicators, such as moving averages or trend lines, to help identify potential entry and exit points. For example, if a trader is using the VWAP as a reference point, they may wait for the price to cross below the VWAP before considering a short position.
Another way to use the VWAP is as a benchmark for evaluating the performance of a trader's strategy. By comparing the performance of a trade to the VWAP, traders can see if they are buying or selling at a fair price. If a trader consistently buys above the VWAP and sells below the VWAP, it may indicate that their strategy needs to be adjusted.