uTrade AlgosThe Volume Weighted Average Price (VWAP) is a crucial indicator in the share market, widely used by traders to assess the average price at which a security has traded throughout the day based on both volume and price. It provides a benchmark for traders to evaluate the current price of a stock relative to its overall trading activity.
Steps to Calculate VWAP
1. Calculate the Cumulative Price-Volume Product:
To calculate VWAP, you first need to multiply the price of the security by the number of shares traded at that price for each trade. This gives you the price-volume product. The formula for this step is:
Price-Volume Product = Price × Volume
This calculation is performed for each trade that occurs during the trading day.
2. Calculate the Cumulative Volume:
Next, you need to calculate the cumulative volume, which is the total number of shares traded up to a specific point in the day. This is done by adding the volume of each trade as it occurs.
3. Divide the Cumulative Price-Volume Product by the Cumulative Volume:
Finally, to get the VWAP, you divide the cumulative price-volume product by the cumulative volume. The formula for VWAP is:
VWAP = ∑(Price×Volume) / ∑Volume
This calculation is updated throughout the trading day as new trades occur, allowing traders to continuously assess whether the current price is above or below the VWAP.
Importance of VWAP
VWAP is particularly useful because it helps traders make decisions about buying or selling a security. If the current price is above the VWAP, it may indicate that the security is overvalued, while a price below the VWAP might suggest it is undervalued. Institutional traders often use VWAP to ensure they are getting a fair price when executing large orders, as it reflects both price and volume over time.