What is Volume-Weighted Average Price ?

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The volume-weighted average price (VWAP) is a technical analysis indicator used on intraday charts that resets at the start of every new trading session. It's the average price a security has traded at throughout the day, based on both volume and price.VWAP is important because it provides traders with insight into both the price trend and value of a security.

Definition

The Volume Weighted Average Price (VWAP) is a technical analysis indicator commonly used on intraday charts and resets at the start of each new trading day. VWAP is calculated based on the volume and price of a security, representing the average trading price throughout the day. Its significance lies in providing traders with insights into the price trend and value of a security.

Origin

The concept of VWAP originated in the 1980s, evolving with the rise of electronic trading. It was initially designed for institutional investors to help them execute large orders without significantly impacting market prices.

Categories and Features

VWAP is primarily used in intraday trading to help traders assess market trends. It combines price and volume, offering a more accurate market price level than a simple price average. VWAP is suitable for large trades as it helps traders avoid exerting excessive influence on market prices.

Case Studies

Case 1: On a trading day, the VWAP for Apple Inc.'s stock is $150. An institutional investor wants to purchase a large quantity of shares without driving up the market price, so they choose to trade around the VWAP to ensure their purchase price is close to the market average.

Case 2: On a trading day, the VWAP for Tesla Inc.'s stock is $700. An intraday trader uses VWAP as a reference to determine if the market is in an upward trend and considers selling when the price is above the VWAP.

Common Issues

Common issues include how to accurately calculate VWAP and how to use VWAP under different market conditions. One misconception is viewing VWAP as a simple buy or sell signal, overlooking its role as a market trend reference.

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