VWAP

VWAP, or volume-weighted average price, is a trading benchmark used primarily for intraday equity trading. It represents the average price at which a security has traded throughout the day, weighted by trading volume. Traders use VWAP to assess price levels and as a reference point for trade execution, while institutions may compare actual performance against the benchmark.

Calculation of VWAP is straightforward in principle: it is the sum over all trades of the trade price multiplied by its volume, divided by the total traded volume over the period of interest. For intraday usage, the calculation is updated as new trades occur, with totals typically starting at market open and, for a daily VWAP, reset at market close. When using price bars, VWAP can be computed by applying the same price-by-volume weighting to each bar and aggregating across the period.

Usage of VWAP centers on execution and benchmarking. Traders may aim to buy below the VWAP or sell above it, seeking prices in line with current market activity to minimize market impact. VWAP is also employed as a performance benchmark and as input for algorithmic trading strategies designed to approximate or track the VWAP trajectory throughout the trading day.

Limitations of VWAP include its dependence on the chosen time window and its lack of predictive power. It can be distorted by large early-day trades, and it may exclude or include pre-market and after-hours data depending on the data source. Variants such as rolling VWAP maintain a moving window rather than resetting daily.