Unlike a simple moving average (which treats every price equally), VWAP gives more weight to prices where higher trading volume occurred. It answers: “What was the true average price most money changed hands at today?”
How VWAP Is Calculated
It resets at the start of each new trading day and is cumulative.
The precise formula (per trade) is:
[ \text{VWAP} = \frac{\sum (\text{Price}_j \times \text{Volume}_j)}{\sum \text{Volume}_j} ]
where ( j ) is each individual trade.
In charting platforms (like TradingView), it’s often calculated using typical price on intraday bars for smoothness:
Typical Price = (High + Low + Close) / 3
Then:
[ \text{VWAP} = \frac{\sum (\text{Typical Price} \times \text{Volume})}{\sum \text{Volume}} ]
(cumulative from market open).9
Simple example:
- Trade 1: 100 shares at $10 → $1,000
- Trade 2: 200 shares at $11 → $2,200
- Trade 3: 100 shares at $12 → $1,200
Total dollars = $4,400
Total volume = 400 shares
VWAP = $11.00
How Traders Actually Use It
- Benchmark for big institutions: They try to buy below VWAP (good execution) and sell above it.
- Intraday bias:
- Price trading above VWAP → bullish (buyers in control)
- Price trading below VWAP → bearish (sellers in control)
- Dynamic support/resistance: Many day traders watch bounces off VWAP.
- Execution quality: If you bought way above VWAP, you probably paid too much.
Here’s what VWAP looks like on a real chart (blue line = VWAP; it resets daily):
wKoyu“LARGE”
And another example with trade signals annotated:
sVc1S“LARGE”
Most platforms plot it automatically. It’s especially popular with day traders and algo traders because it’s a fairer “average” than plain price.
If you’re asking in the context of stocks, crypto, or a specific strategy (Eric, I know you dive into markets sometimes), let me know for more tailored examples!