VWAP (Volume-Weighted Average Price):

Okay, I’m going to talk a little bit about VWAP which stands for volume weighted average price and it is the total dollar amount of trades of a certain security divided by the total number of shares that were traded for whatever period, and generally that’s a day, or from the beginning of the day until whatever time period you’re at.

VWAP is nice to have on your chart for a number of different reasons. One thing to keep in mind is that institutions use VWAP as an indication of whether or not their traders got good values for their trades. So, for instance, if an institution requires a set of traders to purchase a lot of stock for them and over the time that they purchase it their average price is below the average price or the price of VWAP for that time period then that would that would be considered good trading.

Similarly, if an institution has to get rid of a lot of stock and they want to sell it, and over the time period that they sell it the traders that are selling it get a price above VWAP, an average price above VWAP for that time period, that’s considered good trading. In addition to which, if an order comes in from a large pension fund or some other large organization to a group of traders and they have to move that stock they might guarantee VWAP as the price and then try and beat VWAP and keep the difference.

In practical terms, if you are trading and you have VWAP on your chart one thing you’ll notice over time is that prices tend to gravitate back towards VWAP at least once a day. A lot of times in the morning they’ll diverge quite a bit and then after an hour trading, or a couple hours of trading, will come back towards VWAP and a lot of times they won’t deviate too much from the general area of VWAP.

Another thing to make note of is that if the price of a security rises well above VWAP and then starts to come back down towards VWAP a lot of times the VWAP area will act as a support level and it will be a little tough for the price to get below VWAP, or at least there’ll be a tussle, and a lot of times it’ll bounce just before reaching the VWAP. Similarly, if a price is below VWAP and moves up towards VWAP, a lot of times it’ll have trouble getting over VWAP and VWAP will act as a resistance. So, in general, it’s probably a good idea to have VWAP on your charts and to be aware of where it is, and to pay attention to how the price is or might be reacting to that area. Okay, that’s it for VWAP today.