What Is the Indicator "Volume-Weighted Average Price" (VWAP) Good For?

The volume-weighted average price (VWAP) is something that both retail investors and professional traders utilize to the trend and value of the stock. Let's have a look at how it is determined and what it indicates.

How is VWAP Determined?

VWAP is determined by adding dollars traded for each transaction: the price multiplied by the number of shares that have been traded. This is then divided by the total shares traded.

What Does a VWAP Tell You?

It is meant to provide the average price the shares have been traded at throughout the day, relying on volume and price. It also helps traders buy and sell stocks without a massive impact on the market. The power players will generally attempt to exit their positions above the VWAP, allowing the price to move back toward the average.

The best way to develop a play is this: if the price is above VWAP, you can choose to go long. If the price is below VWAP, you can trigger short positions.

One more thing: You may think this is similar to the simple moving average, or SMA. But this is different because SMA does not consider volume levels in an investment's trading.

Trade Like the Power Players

In the end, although every type of investor can use VWAP to their advantage, it is largely exploited by institutional investors and hedge funds.