Overview
The Volume Weighted Average Price (VWAP) is a running intraday average that weights each price by the volume traded at that price level. Because heavier volume periods have more influence on the result, VWAP reflects where the majority of the day's transactions actually occurred, not just where price happened to be at the open or close.
VWAP is widely used as an intraday reference level by both retail and institutional traders. Institutional desks often use it as an execution benchmark: a buy order filled below VWAP is considered better than average, a sell above VWAP is considered better than average. For retail traders, the line itself often serves as a dynamic support and resistance reference.
The Formula
The standard VWAP formula is:
VWAPt = ∑(Pi × Vi) / ∑(Vi)
Where:
- Pi is the typical price for bar i, usually computed as (High + Low + Close) / 3
- Vi is the volume for bar i
- The sums accumulate from the session open through bar t
Some platforms use the closing price or the midpoint price instead of the typical price. This choice alone can produce slightly different VWAP values, which is one reason the same instrument can show a different VWAP on different platforms. See why VWAP differs between platforms for more detail.
Because the formula accumulates from the session open, VWAP is undefined before the first bar of the session and becomes more stable as more volume accumulates. See early session VWAP reliability for implications.
Worked Example: Three-Bar Calculation
Consider a hypothetical three-bar session with the following data:
| Bar | High | Low | Close | Typical Price | Volume | P×V | Cumul. P×V | Cumul. V | VWAP |
|---|---|---|---|---|---|---|---|---|---|
| 1 | 100.50 | 99.50 | 100.00 | 100.00 | 10,000 | 1,000,000 | 1,000,000 | 10,000 | 100.00 |
| 2 | 101.20 | 100.40 | 101.00 | 100.87 | 25,000 | 2,521,667 | 3,521,667 | 35,000 | 100.62 |
| 3 | 102.00 | 100.80 | 101.50 | 101.43 | 15,000 | 1,521,500 | 5,043,167 | 50,000 | 100.86 |
After bar 3: VWAP = 5,043,167 / 50,000 = 100.86. Note that bar 2 had the largest volume (25,000), so its price of 100.87 pulls the VWAP more than bar 1 or bar 3. This is the volume-weighting mechanism at work: high-volume periods matter more than low-volume periods.
These figures are hypothetical and illustrative only. They do not represent any real security.
Limitations and Context
- Bar-based vs. tick-based discrepancy. When a platform computes VWAP using bar midpoints, it assumes volume is evenly distributed throughout the bar. Tick-level VWAP uses every individual trade. See tick VWAP vs. bar VWAP for detail on when this matters.
- Session definition matters. VWAP resets at the session open, so whether the platform uses regular-hours only or includes pre/after-market trades changes the result. See regular-hours vs. extended-hours VWAP.
- Backward-looking only. VWAP tells you where volume-weighted price has been, not where it is going. Price above VWAP does not imply it will stay above VWAP.
- Single-session scope. Standard VWAP loses its reference value once the session resets. For multi-session context, see Anchored VWAP.
Frequently Asked Questions
What does VWAP stand for?
VWAP stands for Volume Weighted Average Price. It is the ratio of the cumulative sum of price-times-volume to cumulative volume, calculated from the start of the trading session.
What price input does VWAP use?
Most platforms use the typical price, which is (High + Low + Close) divided by 3, as the price input for each bar. Some platforms use the closing price or midpoint instead, which can produce slightly different VWAP values.
Does VWAP reset every day?
Standard session VWAP resets at the beginning of each trading session. Anchored VWAP does not reset; it accumulates from a user-chosen anchor point and can span many sessions.
Why does my VWAP look different on another platform?
Common sources of divergence include: different price inputs (typical vs. close vs. midpoint), whether the calculation includes extended-hours volume, the bar granularity used (1-minute vs. tick), and whether the volume source is exchange-reported or consolidated.
Is VWAP useful for long-term analysis?
Standard session VWAP is an intraday tool and loses meaning once the session ends. For multi-session or longer-term analysis, Anchored VWAP is more appropriate because it accumulates from a meaningful structural event without resetting.
References
Disclaimer
This page is for educational purposes only and does not constitute investment, financial, or trading advice. VWAP and related indicators reflect historical price and volume data and do not guarantee future results. Swoopr Investment is not a licensed investment advisor; consult a qualified professional before making trading or investment decisions.