Volume Weighted Average Price
VWAP represents the average price paid for an asset throughout the day, weighted by volume. It's the benchmark institutional traders use to measure execution quality.
What is VWAP?
Volume Weighted Average Price is exactly what it sounds like—the average price weighted by volume. Unlike a simple moving average that treats all prices equally, VWAP gives more weight to prices where more volume traded.
VWAP resets at the start of each trading session, making it primarily an intraday indicator. It answers the question: "What's the true average price that participants paid today?"
Price Above VWAP
Buyers are in control. Intraday bullish bias—longs are winning today.
Price Below VWAP
Sellers are in control. Intraday bearish bias—shorts are winning today.
How It Works
VWAP is calculated by taking the cumulative sum of price times volume, divided by cumulative volume. It updates with each new bar throughout the day.
VWAP Calculation
Typical Price = (High + Low + Close) / 3
VWAP = Σ(Typical Price × Volume) / Σ(Volume)
Because VWAP is cumulative, it becomes more stable as the day progresses. In the first hour, VWAP can swing wildly. By afternoon, it takes significant volume to move it.
Intraday Trading
Day traders use VWAP as dynamic support and resistance. The key rule: buy pullbacks to VWAP in uptrends, sell rallies to VWAP in downtrends.
VWAP Bounce (Long)
- Price above VWAP early in session (bullish bias)
- Wait for pullback to VWAP
- Enter long on bounce from VWAP support
- Stop below VWAP; target previous high
VWAP Rejection (Short)
- Price below VWAP early in session (bearish bias)
- Wait for rally to VWAP
- Enter short on rejection from VWAP resistance
- Stop above VWAP; target previous low
Institutional Use
Large institutions use VWAP as an execution benchmark. Their goal is to execute large orders at or better than VWAP to minimize market impact.
Execution Benchmark
Traders measure performance by comparing fills to VWAP.
VWAP Algorithms
Algorithmic orders slice large trades to match VWAP throughout the day.
Fair Value
VWAP represents the 'fair' price based on actual trading activity.
Understanding this institutional behavior helps retail traders. When price approaches VWAP, expect institutional activity—either defending positions or executing new ones.
VWAP Bands
Standard deviation bands around VWAP create dynamic support and resistance levels. These bands expand with volatility and contract in quiet markets.
Upper Band (+1 or +2 SD)
Overbought zone. Price stretched above fair value—potential mean reversion.
Lower Band (-1 or -2 SD)
Oversold zone. Price stretched below fair value—potential bounce.
Important Note
VWAP resets daily. Do not use it on daily or weekly charts—it's strictly an intraday indicator. For swing trading, consider anchored VWAP from specific pivot points instead.
Frequently Asked Questions
What is VWAP?
VWAP (Volume Weighted Average Price) is the average price of an asset weighted by volume. It represents the average price at which all shares (or contracts) traded during the session and is often used as a benchmark for 'fair value' for that period.
Why is VWAP used for intraday trading?
VWAP resets each session, so it is most meaningful within a single day. Traders use it as dynamic support/resistance: price above VWAP is often considered bullish (buyers in control); below VWAP bearish. Institutions often try to trade at or better than VWAP.
Can I use VWAP on daily or weekly charts?
Standard VWAP resets daily, so it is not suitable for daily or weekly charts. For swing trading, use anchored VWAP—anchored from a specific date (e.g. swing high/low or earnings)—which continues across days and can act as support/resistance.
What are VWAP bands?
Standard deviation bands around VWAP (e.g. ±1 or ±2 SD) create dynamic support and resistance. Price at the upper band can be overbought; at the lower band oversold. Bands expand with volatility and contract in quiet markets.
How do institutions use VWAP?
Institutions often use VWAP as a execution benchmark—they aim to fill orders at or better than VWAP to minimize market impact. Algorithmic orders (TWAP, VWAP) are designed to track or beat VWAP. Retail traders use it for mean reversion or trend confirmation.