VWAP (Volume-Weighted Average Price)
The average price at which a stock has traded throughout the day, weighted by volume. Day traders use VWAP to identify fair value and support/resistance.
VWAP (Volume-Weighted Average Price)
VWAP is the cumulative average price of a stock weighted by volume throughout the trading day. It represents the "fair value" of the stock on that specific day and is widely used by day traders and algorithms.
Formula
VWAP = Cumulative(Typical Price × Volume) ÷ Cumulative(Volume)
where Typical Price = (High + Low + Close) ÷ 3
VWAP resets daily at market open and accumulates throughout the trading session.
Example
On a given trading day, Tesla (TSLA) opens at $250 with 500k shares traded. As the day progresses and more shares trade at different prices, VWAP adjusts to reflect the average price weighted by volume. If heavy volume occurred at $252, VWAP will be pulled toward $252. VWAP at the close becomes the "official" daily fair value.
How to Interpret It
- Price above VWAP: Traders interpret this as bullish; the stock is trading above its daily fair value.
- Price below VWAP: Bearish; the stock is trading below fair value and may bounce back up.
- Support and resistance: VWAP often acts as intraday support (price bounces up) or resistance (price bounces down).
- Opening strategy: Some traders buy if price is above VWAP and sell short if below, betting price stays relative to fair value.
- Volume concentration: If large volume traded at a certain price, VWAP "sticks" there, making it stronger support/resistance.
- VWAP crossovers: When price crosses above or below VWAP with volume, traders see it as a significant move.
Limitations
- VWAP resets every day, so it only applies to intraday trading. It's useless for swing traders or position traders.
- VWAP lags the current price because it includes all previous day trades.
- VWAP works best in liquid, high-volume stocks. Illiquid or penny stocks produce misleading VWAP signals.
- VWAP assumes volume distribution is accurate, which can be wrong if dark pool trading occurs.
Related Terms
- Volume — the number of shares traded
- Average Volume — typical daily volume over a period
- Support and Resistance — price levels where VWAP acts as barriers
- Fair Value — what something should theoretically be worth