Volume Weighted Average Price (VWAP)- A Full Description

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What is the Volume Weighted Average Price (VWAP)?

The meaning of Volume Weighted Average Price (VWAP) is confined in its name as it says the normal price subjective by the volume. It acts as an indicator that is commonly used by the institutional traders in command to determine a price range while placing up orders with their trades. So, technically it is the average trading price weight followed up by the volume of trades meant for the present day. Though, it can also be used by the non-institutional traders for enhancing their investing and trading.

Moreover, security is also provided to the traders constructed on both the volume and the price for a particular day. By which they get an idea or some understanding about the trends running as well as the value of the security for their trade-related business.

Definition of the Volume Weighted Average Price (VWAP):

The Definition of VWAP depicts the transactions average price which is used by the traders for trading out their session. Moreover, it depicts the ratio of the value traded by the whole capacity traded which is for a specific time frame and for a particular period. VWAP is calculated for a particular or a single current day. 

The formula for the Volume Weighted Average Price (VWAP)

  • VWAP = ∑Price * Volume / ∑Volume

OR

  • VWAP = (Cumulative (Price * Volume)) / (Cumulative Volume)

OR this VWAP formula can also be written down as:

  • VWAP = Total amount of dollars transacted / The total shares or contracts which are being traded for the day

So, we can say that VWAP is calculated with the help of the Total amount of dollars transacted which is derived by Sum of Price and volume and with the help of the total shares or contracts which are being traded for the day and which is derived by the sum of total volume.

By what method to Calculate Volume Weighted Average Price (VWAP):

For the calculation of VWAP, you need a chart. And as the chart is related to the primary or the initial 5 minutes of trading. So, we need to assume the 5 minutes VWAP chart for the calculation. and follow the following steps to calculate Volume Weighted Average Price or VWAP.

  1. We will find the first five minute periods the regular price of the stocks which are traded. And for this particular finding, you will be needing a high, low as well as the close VWAP figures which you will divide them by three later on. And then multiply the result by the capacity for that period. And note down the outcome in the spreadsheet under the PV column.

average price of the stocks = (High + Low + Close) / 3

  1. And then we will divide the calculated PV with the volume for that period to find out the VWAP value.
  • Note: You can produce the different columns in the spreadsheet for easy calculation of PV as well as the VWAP value.

Though, the ideal spreadsheet for the calculation of Volume Weighted Average Price (VWAP) would be as follows:

A B C D E F G H I J
1 Date / Time High Low Closed Typical price Volume  TP * V Cumulative TP * V Cumulative Volume VWAP value

The spreadsheet depicted above holds the date or time, High, closed, low, calculated Typical price, with calculated TP * V, with calculated Cumulative TP * V and the Cumulative Volume and The calculated VWAP value.

Calculating the VWAP in Excel

While calculating we need the VWAP data for the first 5 minutes which we have taken up as follows:

A B C D E F
1 Date / Time High Low Closed Typical price Volume 
2 2019-10-10 9:31:00 245.2903 245.516 244.7652 244.8702 103033
3 2019-10-10 9:32:00 245.0807 245.0807 244.55 244.66 21168
4 2019-10-10 9:33:00 244.58 245.8 244.55 245.6 36544
5 2019-10-10 9:34:00 245.7097 246.09 245.57 245.92 30057
6 2019-10-10 9:35:00 245.62 245.62 245.62 245.62 26301

Step 1: You need to find the average or the Typical price

For this we need, the average of low, high and the closed which we will divide by 3.

So, applying the formula as follows:

regular price of the stocks = (High +Low +Close) / 3

  • for 2019-10-10 9:31, the typical price will be calculated as = (245.516 + 244.7652 + 244.8702)/3 = 245.0504667.
  • Similarly, for 9:32, the typical price will be calculated as = (245.0807+ 244.55+ 244.66) / 3 = 244.7635667

Step 2: Multiply the Average price with the capacity for that period and add the earlier period cumulative total to it

  • At 2019-10-10 9:31, the volume traded was noticed as 103033

Consequently, (Price * Volume) will be calculated as = 245.0504667 multiplied by 103033 = 25248284.73

And from now on we will take up the cumulative values from the calculated figure above and then add the previous period’s value with the current value.

  • As, for 9:32, having the volume as 21168, the cumulative typical price will be calculated as = ((Typical price at 9:32) * capacity at 9:32) + (added to) the cumulative overall at 9:31

= [244.7635667 * 21168] + 25248284.73 = 30429439.91

And then we need to find the cumulative whole volume which is calculated by the cumulative typical price multiplied by the volume 

  • Henceforth, for 2019-10-10 9:31, it will just be 103033 as it is the first period of the day.

Intended for 9:32, it will be (Volume at 9:32) + the cumulative volume of the prior period, which will be calculated as i.e. = (21168 + 103033) = 124201.

Step 3: You need to Find the VWAP

It is calculated by dividing the cumulative price multiplied by the volume by the cumulative volume.

A B C D E F G H I J
1 Date / Time High Low Closed Typical price Volume  TP * V Cumulative TP * V Cumulative Volume VWAP value
2 2019-10-10 9:31:00 245.2903 245.516 244.7652 244.8702 103033 245.0504667 25248284.73 103033 245.0504667
3 2019-10-10 9:32:00 245.0807 245.0807 244.55 244.66 21168 244.7635667 30429439.91 124201 245.0015693
4 2019-10-10 9:33:00 244.58 245.8 244.55 245.6 36544 245.3166667 39394292.18 160745 245.073204
5 2019-10-10 9:34:00 245.7097 246.09 245.57 245.92 30057 245.86 46784106.2 190802 245.1971478
6 2019-10-10 9:35:00 245.62 245.62 245.62 245.62 26301 245.62 53244157.82 217103 245.2483744

So, VWAP = cumulative price multiplied by the volume by the cumulative volume.

  • Thus, for 2019-10-10 9:31, VWAP will be calculated as = 25248284.73 / 103033 = 245.0504667
  • For 9:32, VWAP will be calculated as = 30429439.91 / 124201 = 245.0015693

So, these VWAP calculations can be depicted in the spreadsheet as follows:

So, VWAP is calculated by following the above trend but it is calculated for each day. And thus, it needs to be analyzed at each day.

Also Read: Understand the Full Definition of Per Stirpes

How do You Calculate VWAP in Excel?

To calculate VWAP in excel you need to use the spreadsheet, in which you will be invariably applying the formulas for the cells which will be multiplied, divided, as well as added in the calculation of average price, PV and the cumulative PV which will be calculated with the help of VWAP closing, VWAP opening as well as VWAP trend.

The spreadsheet used in the excel will be as follows: 

A B C D E F G H I J
1 Date / Time High Low Closed Typical price Volume  TP * V Cumulative TP * V Cumulative Volume VWAP value
2
  • The High, Low as well as the closed values will be given to us. 
  • The typical price in the E1 will be calculated as follows: B2 + C2 + D2 / 3
  • Similarly, the VWAP value will be calculated as:

VWAP = cumulative price multiplied by the volume by the cumulative volume.

So, VWAP value (in J2) = H2 * I2

VWAP Chart:

While understanding the VWAP chart you will notice 3 Things that also acts as VWAP indicators, which are:

  • VWAP opening
  • VWAP closing
  • And the VWAP trend 

And all these are depicted in the VWAP chart below.

Volume Weighted Average Price (VWAP)

The chart above shows the staring of VWAP, or when the VWAP gets opened up, it also shows the VWAP moving line and where it gets closed. Moreover, it is commonly noticed that the value of VWAP is highest at the opening and the closing point.

Anchored VWAP:

The Anchored Volume Weighted Average Price acts as an indicator that is pragmatic to a precise bar, and it computes the cumulative value as well as the volume for a particular point to find out the weighted average price. Here, the price is set high and then eventually drops down. 

Importance of Volume Weighted Average Price

As depicted in the above figure, the price is set high and it eventually falls down which shows the existence of Anchored Volume-Weighted Average Price.

Importance of Volume Weighted Average Price (VWAP):

Some of the key importance of Volume Weighted Average Price (VWAP) is as:

  • You use VWAP as a part of your research to invest or not to invest in the market.
  • The value of the stock is being analyzed with the help of VWAP.
  • The entry and exit points in the security are well noticed with the help of VWAP charts.
  • You can further check the performance of the stock.
  • Any shift in the motion of the stock can be analyzed.

Limitations of Volume Weighted Average Price (VWAP):

Some of the limitations of the Volume Weighted Average Price (VWAP) are stated as follows:

  • The Volume Weighted Average Price is used for a single day, as they are calculated for the current day.
  • You need to calculate the values for each day leading to huge calculations.
  • VWAP is not the single most factor that should be considered while buying and selling the securities.
  • VWAP is based on the VWAP historic data and does not possess extrapolative abilities or the calculations.

Conclusion:

The VWAP is the average which is weighted by the volume, acting as an indicator used by the institutional traders for determining the price range while placing up orders with their trades. Moreover, it also tells us that if the value of a trade to be purchased is lower than the VWAP, it is good to trade in the market and the vice versa of this holds that if the value is higher than the calculated VWAP then it is not good to trade. Though, having certain limitations and advantages as well, it can opt as a consistent method to choose for trading. 

FAQ

The VWAP itself is a trading indicator which further comprises of the following:

  • The VWAP opening
  • The VWAP closing
  • And the VWAP trend

So, the VWAP indicator is also a lagging indicator, used specially for the periods having higher volume, as it is mostly created or based on the earlier data.

The interval VWAP acts as a measuring tool or the gauging tool, for measuring the volume weighted average price which is held amid the placement and the past fill of a meta order.

The dollars traded for each transaction is divided by the by the total shares traded. Or the other similar formulas for the calculation of VWAP are as follows:

 

  • VWAP = ∑Price * Volume / ∑Volume

 

OR

 

  • VWAP = (Cumulative (Price * Volume)) / (Cumulative Volume)

 

OR this VWAP formula can also be written down as:

 

  • VWAP = Total amount of dollars transacted / The total shares or contracts which are being traded for the day

 

 

The Anchored Volume Weighted Average Price acts as an indicator which is pragmatic to a specific bar, and it calculates the cumulative value as well as the volume for a particular point to find out the weighted average price, which is used in the VWAP.

VWAP is used by the traders to analyse whether the stock is buyable or not. And as, the stock rises above the VWAP then it is said that it is preferable to buy. So, yes VWAP is useful for the traders.

As, different software’s exists. And holding the VWAP requires large data, and the software platform used in forex does not account to hold up the large data. So, VWAP in forex or currencies is not used.

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