Wednesday, October 30, 2013

VWAP Explained


This custom intraday Volume-Weighted Average Price (VWAP) indicator provides estimated current and historical intraday VWAP values. The indicator plots as many as the last four daily VWAPs, as well as the real-time VWAP on the current session of the analyzed security. The historical VWAPs can serve as support and resistance lines as the current session's price action unfolds and can offer valuable information for traders. The intraday VWAP is reset at the beginning of each new trading session and the historical VWAP lines are color coded for visual differentiation of the age of each VWAP line.


VWAP is a ratio widely used in trading. It is based on the price of the security and its volume over a specified time period (usually one day). The numerator is the sum of the security's price over the specified time period multiplied by the corresponding volume; the denominator is the total shares/contracts traded for the time period. The formula for the VWAP can be written as follows:
The formula for the VWAP
PVWAP = Volume Weighted Average Price
Pj = price of trade j
Qj = quantity of trade j
j = each individual trade that takes place over the defined period of time


VWAP has numerous applications in the trading world. It is often used in algorithmic trading, more specifically in volume-participation algorithms. For example, a broker may guarantee the execution of a trade at the VWAP price (known as a Guaranteed VWAP execution). A broker may also offer a VWAP target execution where the broker makes a best effort to execute near the VWAP.
VWAP is also used as a trading benchmark by investors who are not worried about the timing of the trade, but who are concerned about the adverse impact of their trades on the price of the security. The goal is to execute orders in-line with the volume of the market. Many pension funds and some mutual funds fall into this category.
The performance of passive traders is sometimes measured according to the VWAP. Long entry prices that are lower than the VWAP are considered favorable, while entries above the VWAP are considered unfavorable. These non-discretionary trades take place with a general disregard for timing. In this case, VWAP is used to calculate trading costs, since the average entry price would be compared to the VWAP benchmark price. This is the main reason why some argue that using the VWAP as a target reduces transaction costs.
The VWAP calculation can take numerous other forms in practice. In addition to the standard definition above, traders may use VWAP excluding their own transactions, non-block VWAP, VWAP proxies when tick data is unavailable, and value-weighted average for volatile markets in which prices weighted by dollar value of trade are used instead of share/contract volume.

Current Application

VWAP can also be a useful tool for short-term discretionary traders and many different strategies can employ this measurement. One simple well-known strategy is to wait for the price to pierce through the VWAP to the upside when a long position is sought and when the trader is looking for buyers to regain control, since a breakout above VWAP may show upside momentum. The core idea is that the current VWAP and past VWAPs can act as potential support and resistance levels.
Most trading applications only show the current day's VWAP. This is mainly because historical VWAPs require enormous amounts of data, since all the tick and volume data for the different sessions would need to be referenced. One solution is to approximate the historical VWAPs using 1-minute intraday data, cutting down dramatically on the amount of historical data needed. The resulting VWAPs are not exact, but are very close to the actual values.
Indicator Inputs

Indicator Inputs

Name Value Description
TodaysVWAPColor Red Color used for the current intraday VWAP
YesterdaysVWAPCol Blue Color used for yesterday's final VWAP value
TwoDaysAgoVWAPCol Yellow Color used for the final VWAP value of 2 days ago
ThreeDaysAgoVWAPCol Cyan Color used for the final VWAP value of 3 days ago
ThreeDaysAgoVWAPCol Magenta Color used for the final VWAP value of 4 days ago

Indicator Construction

The current intraday VWAP is approximated using a 1-minute intraday chart and the formula listed in the beginning of this paper. The intraday VWAP is displayed using a red line (TodaysVWAPColor input). Depending on how much data is loaded into the chart, the maximum number of VWAPs that can be seen is five at any one time (current VWAP plus previous four daily VWAPs). The last four historical daily VWAPs are color coded using user-defined colors (YesterdaysVWAPCol, TwoDaysAgoVWAPCol, ThreeDaysAgoVWAPCol, and FourDaysAgoVWAPCol inputs) in order to identify how old each VWAP is no matter where on the chart you are looking.
The indicator recognizes whether pre- and/or post-market data is used for equities and the VWAP values are not reset after the pre-market session ends or when the post-market session starts. Therefore, if pre- and post-market data is used, each one of the five different VWAPS includes the data from its pre- and post-market session in the calculations. A 1-minute intraday interval is recommended to better estimate the VWAPs; however, depending on your willingness to accept a margin of error, you may want to experiment with slower intervals (i.e., 5 minutes). The indicator will be able to detect pre- and/or post-market equity data no matter which intraday interval is used (i.e., 5-minute intraday interval).
For additional information on the indicator construction, please refer to the comments inside the EasyLanguage® document.
After you have imported the indicator from the attached .eld file, you can use the workspace provided. Please look for "IntradayVWAPs" in your list of indicators to insert this indicator on a new chart.


Viewing this custom VWAP indicator on an intraday chart reveals that the different VWAP lines often act as resistance and support lines. A VWAP line that was acting as resistance often becomes support once penetrated, while a VWAP line acting as support often becomes resistance once penetrated. The different VWAP lines can also serve as target lines intraday when the price action is caught between lines.
As with any other technical analysis tool, the VWAP lines can work well at times and not so well at other times. A VWAP on stronger-than-average daily volume and/or different VWAPs near the same price may provide a higher probability of acting as potential support or resistance. It might also be interesting to use other technical analysis tools in conjunction with the VWAP lines in order to better discern which line might be providing a stronger support or resistance level.
As described in the Indicator Construction section, the indicator works with, or without pre- and/or post-market equity data. The indicator can be applied to any security where volume is accessible. For example, the indicator works with futures, such as the S&P E-mini futures contract. In that case, the indicator is able to recognize that 17:00 U.S. Central Time on Sunday is the opening time for Monday's session and the VWAP is then reset on the first bar after 15:30 U.S. Central Time.


This custom intraday VWAP indicator sheds light on an area of analysis that is often obscured by the inaccessibility of the needed data. Using intraday data of a short interval provides active traders with VWAP values accurate enough to be of practical use. The different VWAP lines often act as support and resistance lines for the considered security and can offer valuable information for traders.
Potential future versions of this indicator may include the flexibility to specify an exact time period to take into consideration for the VWAP calculations. In addition, inputs could be made available to create custom sessions to consider for the VWAP calculations. For example, maybe only the first and last hours of the regular session should be included in the VWAP calculation. Lastly, the width of the VWAP lines could be made to vary depending on the daily volume for additional visual assistance as to which line might be relatively more important. Stay tuned!


   Intraday VWWAPs
In order to open the sample workspaces provided, you may first need to import the custom EasyLanguage® file with the extension .eld. Copy the attached .eld file and workspaces to your computer. Then import the indicators or strategies by double-clicking on the EasyLanguage .eld file. This will automatically start the TradeStation import wizard. Click 'Next' until the Analysis Techniques and/or strategies have been imported. The indicators are now available and you can now open the provided workspaces. Other supportive documents or files may also be attached to this e-mail.
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Another view from


Volume-Weighted Average Price (VWAP) is exactly what it sounds like: the average price weighted by volume. VWAP equals the dollar value of all trading periods divided by the total trading volume for the current day. Calculation starts when trading opens and ends when trading closes. Because it is good for the current trading day only, intraday periods and data are used in the calculation.

Tick versus Minute

Traditional VWAP is based on tick data. As one can imagine, there are many ticks (trades) during each minute of the day. Active securities during active time periods can have 20-30 ticks in one minute alone. With 390 minutes in a typical stock exchange trading day, many stocks end up with well over 5000 ticks per day. There are over 5000 stocks traded every day and these ticks start adding up exponentially. Needless to say, tick-data is very resource intensive.
VWAP - Chart 1
Instead of VWAP based on tick data, offers intraday VWAP based on intraday periods (1, 5, 10, 15, 30 or 60 minute). Note that VWAP is not defined for daily, weekly or monthly periods due to the nature of the calculation (see below).


There are five steps involved in the VWAP calculation. First, compute the typical price for the intraday period. This is the average of the high, low and close {(H+L+C)/3)}. Second, multiply the typical price by the period's volume. Third, create a running total of these values. This is also known as a cumulative total. Fourth, create a running total of volume (cumulative volume). Fifth, divide the running total of price-volume by the running total of volume.
Cumulative(Volume x Typical Price)/Cumulative(Volume)

VWAP - Spreadsheet 1
The example above shows 1-minute VWAP for the first 30 minutes of trading in IBM. Dividing cumulative price-volume by cumulative volume produces a price level that is adjusted (weighted) by volume. The first VWAP value is always the typical price because volume is equal in the numerator and the denominator. They cancel each other out in the first calculation. The chart below shows 1-minute bars with VWAP for IBM. Prices ranged from 127.36 on the high to 126.67 on the low for the first 30 minutes of trading. It was actually a pretty volatile first 30 minutes. VWAP ranged from 127.21 to 127.09 and spent its time in the middle of this range.
VWAP - Chart 2


Like moving averages, VWAP lags price because it is an average based on past data. The more data there is, the greater the lag. A stock has been trading for some 331 minutes by 3PM. As a cumulative "average", this indicator is akin to a 330 period moving average. That is a lot of past data. The 1-minute VWAP value at the end of the day is often quite close to the ending value for a 390 minute moving average. Both moving averages are based on the 1 minute bars for that day. At the close, both are based on 390 minutes of data (one full day). One cannot compare the 390 minute moving average to VWAP during the day though. A 390 minute moving average at 12:00PM will include data from the previous day. VWAP will not. Remember, VWAP calculations start fresh at the open and end at the close. 150 minutes of trading have elapsed by 12:00PM. Therefore, VWAP at 12:00 would need to be compared with a 150 minute moving average.
VWAP - Chart 3
Despite this lag, chartists can compare VWAP with the current price to determine the general direction of intraday prices. It works similar to a moving average. In general, intraday prices are falling when below VWAP and intraday prices are rising when above VWAP. VWAP will fall somewhere between the day's high-low range when prices are range bound for the day. The next three charts show examples of rising, falling and flat VWAP.
VWAP - Chart 4 VWAP - Chart 5 VWAP - Chart 6

Uses for VWAP

VWAP is used to identify liquidity points. As a volume-weighted price measure, VWAP reflects price levels weighted by volume. This can help institutions with large orders. The idea is not to disrupt the market when entering large buy or sell orders. VWAP helps these institutions determine the liquid and illiquid price points for a specific security over a very short time period.
VWAP can also be used to measure trading efficiency. After buying or selling a security, institutions or individuals can compare their price to VWAP values. A buy order executed below the VWAP value would be considered a good fill because the security was bought at a below average price. Conversely, a sell order executed above the VWAP would be deemed a good fill because it was sold at an above average price.


VWAP serves as a reference point for prices for one day. As such, it is best suited for intraday analysis. Chartists can compare current prices with the VWAP values to determine the intraday trend. VWAP can also be used to determine relative value. Prices below VWAP values are relatively low for that day or specific time. Prices above VWAP values are relatively high for that day or specific time. Keep in mind that VWAP is a cumulative indicator, which means the number of data points progressively increases throughout the day. On a 1-minute chart, IBM will have 90 data points (minutes) by 11AM, 210 data points by 1PM and 390 data points by the close. The number dramatically increases as the day extends. This is why VWAP lags price and this lag increases as the day extends.


Volume-Weighted Average Price (VWAP) can be plotted as an "overlay" indicator on Sharpcharts. After entering the security symbol, choose an "intraday" period and a "range." This can be for 1 day or "fill the chart." Chartists looking for more detail can choose "fill the chart." Chartist looking for general levels can choose 1 day. VWAP can be plotted over more than one day, but the indicator will jump from its prior closing value to the typical price for the next open as a new calculation period begins. Also note that VWAP values can sometimes fall off the price chart. VWAP at 45.5 will be show up on a chart with a price range from 45.8 to 47. Chartists sometimes need to extend the range to a full day to see VWAP on the chart. The VWAP value is always displayed at the top left of the chart. Click the chart below to see a live example.
VWAP - Chart 7
VWAP - SharpCharts

and still another, very simple, from Investopedia:

Definition of 'Volume Weighted Average Price - VWAP'

A trading benchmark used especially in pension plans. VWAP is calculated by adding up the dollars traded for every transaction (price multiplied by number of shares traded) and then dividing by the total shares traded for the day.

Volume Weighted Average Price (VWAP)

Investopedia explains 'Volume Weighted Average Price - VWAP'

The theory is that if the price of a buy trade is lower than the VWAP, it is a good trade. The opposite is true if the price is higher than the VWAP.