Volume-Weighted Average Price (VWAP)

What Is VWAP?

Volume-Weighted Average Price (VWAP) is an intraday trading benchmark that calculates the average price at which a security has traded throughout the session, weighted by volume at each price level. Unlike a simple price average, VWAP gives more weight to price levels where more shares changed hands, making it a more accurate representation of the "true" average price for the day.

VWAP resets at the beginning of each trading session and accumulates data as the day progresses. It appears as a single line on an intraday chart, typically anchored to the day's opening and building through the close.

How Traders Use VWAP

Institutional benchmarking is VWAP's original and most important function. Algorithmic execution systems for large institutional orders frequently target VWAP as their execution benchmark. This means massive order flow is tied to the VWAP level, making it a self-reinforcing level on the chart.

Intraday trend identification uses VWAP as a dividing line. Price consistently above VWAP suggests intraday bullish control (buyers are willing to pay above the average price). Price below VWAP suggests bearish control. Day traders often use VWAP as a trend filter: only taking long trades above VWAP and short trades below.

Support and resistance around VWAP develops because of the institutional order flow concentrated at this level. Price often bounces off VWAP during the day, particularly when the overall trend is strong. Some traders use VWAP bands (standard deviations above and below VWAP) similar to Bollinger Bands for overbought/oversold readings on an intraday basis.

Anchored VWAP

Anchored VWAP extends the concept by allowing traders to start the calculation from any chosen bar rather than the session open. Anchoring VWAP to significant events, such as an earnings report, a major swing low, or a breakout candle, reveals the average price paid by all participants since that event. If price is above the anchored VWAP from a swing low, the average buyer since that low is profitable. If price drops to that anchored VWAP, it represents a level where the average buyer breaks even, often creating strong support.