Volume-Weighted Average Price (VWAP)
Volume-Weighted Average Price (VWAP) is a trading Benchmark that represents the average price a security has traded at throughout the day, based on both volume and price. It is calculated by taking the total value of all trades (price times volume) and dividing it by the total volume of trades for a given period. VWAP is commonly used by traders to assess the price trend of a security and to make decisions about buying or selling.
Formula:
VWAP = (Sum of (Price × Volume)) / (Total Volume)
Example:
Suppose a Stock trades at the following prices and volumes:
Calculating VWAP:
- Total Value = (10 × 100) + (11 × 200) + (12 × 300) = $1000 + $2200 + $3600 = $6800
- Total Volume = 100 + 200 + 300 = 600 Shares
- VWAP = $6800 / 600 = $11.33
Cases:
1. **Institutional Trading**: Traders may use VWAP to ensure that they buy or sell Shares at a price that is better than the average price throughout the day.
2. **Market Orders**: When executing large Market Orders, traders may aim to transact at prices close to VWAP to minimize market impact.
3. **Performance Measurement**: VWAP can be used as a Benchmark for the performance of trading strategies, helping to evaluate whether trades were executed efficiently.