Volume-Weighted Average Price (VWAP)
The "average cost" of every trade today. Institutions often use it to judge whether they bought expensively or cheaply.
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Text version · Volume & Volatility Indicators, lesson 2: “Volume-Weighted Average Price (VWAP)”
The "average cost" of every trade today. Institutions often use it to judge whether they bought expensively or cheaply.
More volume, more weight
VWAP is the share-weighted average of every trade during the day: total value traded ÷ total shares. It's the "average cost" of all of the day's buyers, and it resets at every open.
Is price above or below VWAP?
Price above VWAP means today's buyers are making money overall, so the tape is strong; below it, most are underwater, so it's weak. Big money often aims to "buy below VWAP" when executing.
Resets to zero each day
VWAP usually starts accumulating fresh at each open: it jumps around a lot at first, and the closer to the close, the less each new trade moves it, so the line steadies. Over several days, traders often use a VWAP anchored to the day of some event instead.
Key takeaways
- VWAP = Σ(typical price × volume) ÷ Σvolume. Prices with more trading carry more weight, and it usually resets at each day's open.
- Price above VWAP: today's buyers are in profit on average and the market looks strong; below it, weak.
- Big money often sets "average fill no worse than VWAP" as its execution target.
Try it yourself
You can do these exercises in this lesson's interactive simulation:
- Click "Example": 100 shares at $10 and 300 shares at $20. Where does the pivot rest? Why isn't it the simple average of $15?
- Add another 500 shares at $25 and watch which way the pivot slides, and how far.
- Play a single day: what share of the time is price above VWAP? During that time, were today's buyers up or down overall?
- Switch to "Three days in a row": at each day's open, how does VWAP differ from the dashed line that never resets?
Quiz and explanations
- 1. Two trades: 100 shares at $10 and 300 shares at $20. What's the VWAP?
- Answer: $17.5.($1,000 + $6,000) ÷ 400 = $17.5.
- 2. Price trades below VWAP all day. What does that mean?
- Answer: The day is weak, and most buyers are at a loss.VWAP is the day's average cost.
- 3. After trades of 100 shares at $10 and 300 at $20 (VWAP $17.5), another 500 shares trade at $25. VWAP will…
- Answer: Move up toward $25.The new trade is above the current VWAP and large, so the weighted average gets pulled up: ($7,000 + $12,500) ÷ 900 ≈ $21.7.
Terms in this lesson
- VWAP (Volume-Weighted Average Price): The volume-weighted average trade price: the average cost of all the day's trades.