How is VWAP calculated?

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VWAP, or Volume-Weighted Average Price, is calculated in the last 30 minutes of the market. Here’s a simplified breakdown:

1. Determine Typical Price: For each period (e.g., in seconds), calculate the typical price by averaging the high, low, and closing price of that period.
2. Calculate Weighted Price: Multiply the typical price for each period by the trading volume for that period.
3. Calculate Cumulative Volume: Sum the trading volume across all periods up to the current point in time.
4. Calculate VWAP: The mathematical formula to calculate the volume-weighted average price is: VWAP = Typical Price x Volume/Cumulative Volume

Example of VWAP

In the above equation, the typical price is the average of the high price, the low price, and the closing price. You can calculate it by using the formula: Typical Price (TP) = high price + low price + closing price/3

To get a better understanding of the calculation, let us look at an example. Let’s assume the high price = 20, low price = 10, and the average closing price = 15. Then, applying the typical price formula, we get: TP = 20+10+15/3 = 15

Then, multiply the TP by the volume, so let us assume the volume of the period is (V) = 20. Therefore, TP*V = 300

Cumulative volume for the stock, which in this case, let us assume is = 75 So, VWAP = TP*V/CV = 300/75 = 4

One can calculate the VWAP for every period, which will result in the formation of a VWAP curve on the price chart.

In essence, VWAP gives more weight to periods with higher trading volume, providing a more accurate representation of the average price.

Watch Everything about VWAP Trading Strategy to learn about VWAP in detail. This video breaks down the practical applications of VWAP, showing you how these numbers can directly improve your trading decisions. 

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