VWAP (Volume Weighted Average Price) is the average price weighted by volume traded, calculated continuously during the trading day.
Calculation Example
| Time | Price | Volume | Price × Volume |
|---|---|---|---|
| 09:00 | 100p | 10,000 | 1,000,000 |
| 10:00 | 101p | 15,000 | 1,515,000 |
| 11:00 | 99p | 5,000 | 495,000 |
| Total | 30,000 | 3,010,000 |
VWAP = 3,010,000 ÷ 30,000 = 100.33p
Formula: Σ(Price × Volume) ÷ Σ(Volume)
VWAP resets daily at market open and updates in real-time with each trade.
Primary Uses
| Use Case | Description |
|---|---|
| Execution benchmark | Measure trade quality against market average |
| Algorithmic target | Algos aim to match or beat VWAP |
| Performance metric | Institutions report execution vs VWAP |
| Fair value indicator | Volume-weighted representative price |
Trading Against VWAP
Institutional traders break large orders into smaller pieces executed throughout the day, attempting to match or "beat" VWAP. This minimises market impact while achieving average market pricing.
"Beat VWAP" means:
- Buyers: Execute below VWAP (paid less than average)
- Sellers: Execute above VWAP (received more than average)
Limitations
- Backward-looking (based on past trades only)
- Skewed by high-volume periods
- Not suitable for urgent trades
- Can be gamed near market close