What is The VWAP?
The volume weighted average price (VWAP) is a trading benchmark that is used by traders to give the average price a security has traded throughout the day. Based on volume and price, the VWAP is important as it provides traders with insight not only into the trend, but also the value of a security.
How To Use The VWAP
The volume weighted average price is calculated by adding up the dollars traded for every transaction, then dividing that by the total shares traded. The VWAP resets daily and can be calculated based on the exchange, primary and custom defined session.
The purpose of VWAP is to allow large institutional buyers and mutual funds to move into or out of stocks with as small of a market impact as possible. In order to do that successfully, institutions will either buy below the VWAP or they will sell above it. This allows the price to fall back toward the average, rather than away from it.
Other factors of importance for the volume weighted average price include being able to indicate if the market is bearish or bullish. The market is bullish when the price is below the VWAP, and bearish if it is above the VWAP. Another is that the VWAP will allow you to know when to buy or sell as it allows traders to use the VWAP line as an indicator to buy at a low price, therefore making more profits when they sell stock.