In finance, volume-weighted average price (VWAP) is the ratio of the total value traded in a security to the total volume of transactions over a defined period, typically a single trading session. It is a measure of the average price at which the security has traded during that period, weighted by transaction size, and is used both as an execution benchmark and as a technical indicator.
Calculation
VWAP is calculated as the cumulative value traded divided by the cumulative volume traded over the chosen window:
:<math>P_\mathrm{VWAP} = \frac{\sum_j P_j \, Q_j}{\sum_j Q_j}</math>
where <math>P_j</math> is the price of trade <math>j</math>, <math>Q_j</math> is its quantity, and the sum runs over each individual trade in the defined period. Cross trades and basket cross trades are typically excluded. The concept was formalized academically in a 1988 Journal of Finance paper by Berkowitz, Logue, and Noser, which used VWAP as a yardstick for the total transaction cost of trading on the New York Stock Exchange.
Algorithmic execution
Trading algorithms that target VWAP belong to a class called volume participation algorithms. They forecast the intraday volume profile of the security and submit slices of the parent order in proportion to expected or realized volume. Cartea and Jaimungal subsequently derived a closed-form VWAP-targeting strategy under a more general microstructure model.
Technical indicator
VWAP is also used by discretionary traders as an intraday reference level. Prices trading above the day's VWAP are commonly interpreted as bullish and prices below it as bearish, in a manner analogous to a moving average. Some traders use crossings of price through the VWAP line as entry signals, initiating long positions on upward crossings and short positions on downward crossings.