VWAP
The day's average price, weighted by how much traded, and why day traders watch it.
An average that counts the crowd
Imagine your lemonade stand on a hot Saturday:
- In the morning you sold 10 cups at $1.
- In the afternoon, when it got hot, you sold 30 cups at $2.
What was your average price? If you just average the two prices, (1 + 2) ÷ 2 = $1.50. But that ignores the fact that you sold way more cups at $2.
So weight it by cups. Total money ÷ total cups:
- Money: 10 × $1 + 30 × $2 = $10 + $60 = $70
- Cups: 10 + 30 = 40
- Average price per cup: 70 ÷ 40 = $1.75
That's the idea behind , the Volume Weighted Average Price. Prices where lots of shares traded count more. Prices where only a few traded count less.
How it's drawn
VWAP starts at the opening bell and adds up each candle's price times its , candle by candle. Most apps use each candle's "typical price," which is its high, low and close averaged together. At the end of the day it stops, and the next morning it starts fresh. That's why VWAP is mostly used on charts, like 1-minute or 5-minute candles.
Why day traders watch it
, people who open and close their trades within one day, use VWAP the most.
- A report card for big buyers. Big funds that need to buy millions of shares often try to pay at or below the day's VWAP. If they paid less than VWAP, they did a good job. So VWAP is a , a measuring stick.
- Who's ahead today. Price above VWAP means the average buyer today is in profit, and buyers have the upper hand. Price below VWAP means the average buyer today is losing, and sellers have it.
- A level to watch. Because so many eyes are on it, price often pauses or bounces near VWAP during the day.
Where it fails
- Early in the day, there are only a few candles, so VWAP jumps around and means little.
- It resets every day, so it says nothing about the week or the month.
- Late in the day, so many shares have already traded that VWAP barely moves, and price can wander far away from it.
- Choppy days. Price can cross VWAP back and forth many times. Crossing it is not a guarantee of anything.
Remember
- VWAP is the day's average price, where prices with more volume count more.
- It starts over every trading day.
- Above VWAP, buyers are ahead today. Below it, sellers are ahead today.
- Big traders use it as a report card, which is one reason price often reacts near it.
Check yourself
1. You sold 30 cups at $1 and 10 cups at $3. What's the VWAP?
2. When does VWAP start over?
3. Price stays above VWAP most of the day. What does that suggest?
4. Why is VWAP jumpy early in the day?
Next lesson: Fibonacci
Money Tree School is education, not financial advice. Examples use made-up or historical numbers to show how things work; they are not recommendations to buy or sell anything. Markets can lose money.