Volume-weighted average price (VWAP)

In simple terms

The volume-weighted average price (VWAP) is the average price paid for a share during a session, counting each trade according to how many shares changed hands. A price at which 10,000 shares traded counts ten times as much as a price at which 1,000 traded.

Many quote screens show the day's VWAP alongside the last traded price, as the reading a stock quote lesson explains.

Calculating VWAP

Charting tools usually calculate VWAP from intraday bars, using a "typical price" for each bar, often (high + low + close) ÷ 3, weighted by the bar's volume, and adding up through the day.

Why institutions use VWAP

A fund buying lakhs of shares cannot buy them all at once without pushing the price up. It spreads the order through the day. To judge how well the order was carried out, it compares its average buying price with the day's VWAP:

• Bought below VWAP: paid less than the average trade that day.
• Bought above VWAP: paid more.

Brokers offer orders designed to track VWAP for this reason. VWAP is an execution benchmark: a measure of trading skill on a given day.

VWAP resets each session

Standard VWAP starts fresh at the beginning of each session, so it describes that day only. Early in the day, it moves quickly with each trade; late in the day, it moves slowly, because it already includes most of the day's volume.

Anchored VWAP starts from a chosen point, such as a results announcement or a major low, and accumulates from there. It shows the average price paid by everyone who traded since that event. Choosing the anchor is a judgement, and different anchors give different lines.

What buying below VWAP does not mean

A common trading tip says to buy below VWAP because you are getting "a good price". That confuses two things:

• Execution quality: paying less than the average trade today, which VWAP measures.
• Value: whether the share is worth more than you paid, which VWAP says nothing about.

A share falling steadily all day will trade below its VWAP for most of the day, and buying it there can still lose money. VWAP is about the day's trading, not the company.

Why it matters

VWAP appears on most trading screens and in many intraday trading strategies. Understanding that it is an average of the day's trades, designed as a benchmark for executing large orders, helps you use it for what it is good at and avoid treating it as a signal of value or direction.

Limitations

VWAP describes one session, or the period since an anchor, and ignores everything before. It is heavily influenced by a few large trades in thinly traded shares. Different platforms calculate it slightly differently, for example in how they handle the opening auction.

Common mistakes

• Treating "below VWAP" as cheap.
• Using daily VWAP for decisions spanning weeks or months.
• Forgetting that VWAP resets each day.
• Comparing VWAP values from different sources that calculate it differently.

Try it yourself

1. Note the VWAP shown on the exchange website for any share at the end of a session.
2. Compare it with the day's close and the day's simple average of high and low.
3. On an intraday chart with VWAP, note how much the VWAP line moved in the first hour compared with the last hour.
4. Write a sentence on what buying at VWAP that day would and would not tell you.