Forex Glossary

Volume-Weighted Average Price (VWAP)

Volume-Weighted Average Price (VWAP) is a trading indicator used in financial markets to calculate the average price of a security or asset over a specified period, taking into consideration the trading volume during that period. VWAP is often used by institutional traders and algorithmic trading systems to assess the average price at which a particular security has been traded throughout the day.

The VWAP is considered an important indicator because it takes into account both price and volume, providing a weighted average that reflects the significance of different trading volumes at various price levels. It can help traders assess the average entry or exit price for a security and make informed decisions based on the prevailing market conditions.

How Institutaions Use VWAP

Many large institutions may utilize the intraday VWAP (volume-weighted average price) as a fair value benchmark to continue accumulating or distribution campaigns.

This means that if the price is lower than VWAP and they have an urgent order to purchase a particular number of millions of shares in a given number of days, they will desire to buy lower than VWAP.

However, if they fall far behind in their accumulation campaigns, they may begin to buy slightly above VWAP to demonstrate their hand, or if many do so, they compete for the same VWAP bid.

Many day traders are aware of this and prefer to enter bullish momentum trades when the price diverges above VWAP (or bearish bets when the price diverges below VWAP).

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