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What is Volume Weighted Average Price (VWAP)?

What is Volume Weighted Average Price (VWAP)?

The Volume Weighted Average Price (VWAP) helps traders consider the influence of volume on prices. VWAP is calculated by taking the average of prices from a time period and dividing it by the trading volume for the current day.

Traders use VWAP to confirm trends and decide whether to take long or short positions, while large institutions are likely to use VWAP to avoid disrupting market prices, finding the liquid and illiquid price points and trading so as not to move prices away from the averages.

VWAP can be used like a moving average when charted, with prices above the line reflecting Bullish tendencies and below the line Bearish tendencies. It can also be used as a Pivot Point, where intraday prices above the previous day’s VWAP are likely rising, or falling if intraday prices are below the previous VWAP.

The VWAP is visually similar to the Simple Moving Average (SMA), but they are not the same. A Simple Moving Average (SMA) is a technical indicator that can help traders determine whether a bull or bear trend will continue or reverse course, and typically adds up closing prices for a given time period, then divides that figure by the number of time periods used for the average. It does not take volume into account, however, like VWAP.

Like all indicators, VWAP has weaknesses. Because it is a daily measure, calculated daily, VWAP can misrepresent long-term trends. Its reliance on historical values means it has limited predictive capability, and it is prone to lag. That’s why it’s especially important for traders to look for additional signals to confirm or reconsider their potential trading decisions. Fortunately, A.I. is here to help. Tickeron’s Artificial Intelligence, known as A.I.dvisor, gives traders powerful ways to evaluate trade ideas, analyze signals, and provide the key confirmation needed to make rational, emotionless, and effective trades.

Keywords: liquidity, trading volume, moving average, weighting, pivot point, Volume Weighted Average Price (VWAP),