Volume Weighted Average Price (VWAP) has become a fixture on modern trading platforms. From Wikipedia:
In finance, volume-weighted average price (VWAP) is the ratio of the value traded to total volume traded over a particular time horizon (usually one day). It is a measure of the average price at which a stock is traded over the trading horizon. VWAP is often used as a trading benchmark by investors who aim to be as passive as possible in their execution. Many pension funds, and some mutual funds, fall into this category. The aim of using a VWAP trading target is to ensure that the trader executing the order does so in-line with volume on the market.
CALCULATING VWAP
While calculating VWAP accurately CAN require large amounts of data, the concept is not difficult. It is simply the average price over a trading session (or other time period) weighted by trade volume. For example, say we have a bar with the following trades:
100 contracts at 2906.00
145 contracts at 2906.25
25 contracts at 2906.50
To calculate this bar’s VWAP, we would first multiply each trade price by volume and get the total:
100 x 2906.00 = 290,600.00
145 x 2906.25 = 421,406.25
25 x 2906.50 = 72.662.50
Total 784,668.75
Next, total the volume:
100
145
25
270
And finally, divide the price x volume total by the volume total to get VWAP:
VWAP = 784,668.75 / 270 = 2906.18
The most accurate way to calculate VWAP is using individual tick-by-tick trade data. If you choose tick source data with Insider Bars, this is how it is calculated. In addition to tick source data, Insider Bars also offers one second and one minute source data, which allow you to access more data history than is available with TradeStation tick data. When using these, VWAP is calculated based on one second or one minute data, respectively.
VWAP IS A DISCRETE FUNCTION
VWAP, like many of the volume derivative tools in Insider Bars, is a discrete function. Most of the indicators you are familiar with are continuous. To illustrate, let’s compare VWAP to a similar indicator, a moving average. A moving average flows bar to bar, with new bars added and old bars falling away. VWAP resets at the beginning of every period. From the internet:
You can draw a continuous function without lifting your pencil from your paper. A discrete graph is a series of unconnected points.
This is an important distinction to understand. Markets are organized around discrete time periods. We will revisit this concept in a later post.
LONG TERM VWAP
Most traders are only familiar with session-based VWAP. However, Insider Bars offers VWAP on individual bars plus the following additional time frames:
- Week
- Month
- Quarter
- Year
You may have two time frames on a chart.
The longer-term applications can be very powerful. For example, Nike recently dropped sharply after announcing a controversial advertising campaign. But the selloff was contained by the quarterly VWAP:
Or here is another example, of Facebook’s recent retracement being contained by the quarterly VWAP:
PRIOR PERIOD VWAP
The prior period VWAP (prior day, prior week, etc.) also offers important support and resistance. In Insider Bars, this is displayed as a straight line plot. Here is an example of session and prior session VWAP on pit session Emini S&P 500 futures.
