Volume-Weighted Average Price (VWAP)
Quick Definition
A trading benchmark that calculates the average price weighted by volume throughout the day, showing the true average price institutional traders paid.
Key Takeaways
- VWAP calculates the average price weighted by volume, resetting each trading session
- Institutional traders use it as a benchmark — buying below VWAP is favorable execution
- Acts as dynamic support in uptrends and resistance in downtrends
- Anchored VWAP allows calculation from any significant price event for longer-term analysis
What Is Volume-Weighted Average Price (VWAP)?
Volume-Weighted Average Price (VWAP) is a trading benchmark calculated by dividing the total dollar value of all trades by the total volume of trades for a given period, typically one trading day. Unlike a simple moving average, VWAP gives more weight to price levels where more volume was traded, providing a more accurate representation of the "true" average price. VWAP is widely used by institutional traders as a benchmark for order execution — buying below VWAP is considered favorable execution, and selling above VWAP is considered favorable. For retail traders, VWAP acts as a dynamic support/resistance level: in uptrends, price tends to stay above VWAP (which acts as support), while in downtrends, price stays below VWAP (acting as resistance). VWAP resets at the start of each trading session. Anchored VWAP (aVWAP) extends this concept by allowing the calculation to start from any significant point (earnings, IPO, swing high/low). Standard deviation bands around VWAP (±1σ, ±2σ) create overbought and oversold zones similar to Bollinger Bands.
Volume-Weighted Average Price (VWAP) Example
- 1A day trader buys when price pulls back to VWAP during an uptrend day, using VWAP as dynamic support with a target at the upper VWAP band.
- 2An institutional trader compares their average execution price to VWAP — buying at $49.50 when VWAP is $50.00 represents favorable execution.
Related Terms
Volume Profile
A charting tool that displays the total volume traded at each price level over a specified period, revealing areas of high and low trading activity.
Simple Moving Average (SMA)
A technical indicator that calculates the arithmetic mean of a security's price over a specified number of periods to smooth price data and identify trends.
Exponential Moving Average (EMA)
A type of moving average that gives greater weight to recent prices, making it more responsive to new information than a simple moving average.
Support and Resistance
Key price levels where buying pressure (support) prevents further decline or selling pressure (resistance) prevents further advance.
Market Profile
A charting method that organizes price and time data into a bell-curve distribution, showing where the most trading activity occurred at each price level.
Moving Average
A calculation that averages a security's price over a specific number of periods, smoothing price data to identify trends.
Expand Your Financial Vocabulary
Explore 130+ financial terms with definitions, examples, and formulas
Browse Technical Analysis Terms