VWAP blends price and volume to create a more accurate view of market activity. Instead of treating each trade equally, it gives more weight to trades with higher volume. This makes VWAP a better reflection of where buyers and sellers were most active throughout the day.
Traders and institutions use VWAP to evaluate execution quality. If a trade happens below VWAP in a buy order, it’s often considered a good fill. If it happens above VWAP, it might indicate paying too much. This benchmark helps traders understand whether they’re trading in line with the broader market.
VWAP also acts as a dynamic indicator on charts. When price stays above VWAP, it often suggests strength, while staying below it may hint at weakness. Because VWAP resets daily on most platforms, it’s commonly used by intraday traders to track fair value throughout the session.
VWAP helps traders measure trade performance, gauge market sentiment, and identify fair value levels during the trading day. It blends price and volume into a single, practical benchmark.
VWAP is calculated by multiplying each price by its trade volume, adding those values together, and then dividing by total volume for the period. This creates a weighted average instead of a simple average. The calculation resets daily to reflect fresh market conditions. Traders often view VWAP as a real-time measure of the day’s trading activity. This makes it useful for intraday decisions and execution strategies.
Institutional traders use VWAP to benchmark the quality of their large orders. Because big trades can move markets, institutions aim to execute near VWAP to avoid disrupting price. A fill near or better than VWAP suggests the order blended smoothly with overall market activity. VWAP also helps measure how efficiently algorithms execute large positions. This makes it one of the most important benchmarks for order execution.
Traders use VWAP to identify intraday support or resistance. When price stays above VWAP, it often signals strong buying interest, while drifting below may indicate selling pressure. Some traders combine VWAP with other indicators to confirm trend strength. VWAP can also act as a filter to avoid low-quality setups by requiring price to align with broader market flow. These uses make VWAP a versatile tool in intraday trading.
A trader wants to buy shares of a stock that has been trending upward all morning. They wait for price to pull back close to VWAP before entering, aiming for a lower-risk entry aligned with the day’s average trading activity. The trade performs better because it follows the broader flow of volume.
