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Day traders can use many strategies and indicators to make decisions. Among the most popular is volume-weighted average price (VWAP). This blog post will look at VWAP and how day traders can use it.

 

What is the Volume-weighted Average Price? 

Volume-weighted average price (VWAP) is a trading benchmark used by traders. It is the average security price over time weighted by the volume traded in that period. VWAP is also a default order type on many electronic trading platforms. 

 

How to Calculate VWAP 

To calculate VWAP, you’ll need three things: the total number of shares traded, the total value of those shares traded, and the length of time over which you want to calculate the VWAP. 

Here’s the formula: 

VWAP = (Number of shares traded * Share price) / Total number of shares traded 

For example, let’s say you want to calculate the VWAP for a stock over five days. 

  • On day one, 100 shares were bought at $10 per share
  • On day two, 200 shares were bought at $20 per share.
  • On day three, 300 shares were bought at $30 per share
  • On day four, 400 shares were bought at $40 per share
  • And on day five, 500 shares were bought at $50 per share

The calculation would look like this: 

VWAP = ((100*10)+(200*20)+(300*30)+(400*40)+(500*50))/ (100+200+300+400+500) 

Which equals $30.

 

Why Use VWAP?  

Some traders use VWAP as an objective way to assess whether a stock is undervalued or overvalued. Suppose the current market price is trading below the VWAP level. In that case, some traders may view this as an opportunity to buy the stock while it is undervalued. Conversely, suppose the current market price is trading above the VWAP level. In that case, some traders may view this as an opportunity to sell short the stock while it is above. Of course, other factors should be considered before taking any trade action. 

Another potential benefit of using VWAP is that it can help avoid “price slippage.” Price slippage occurs when an order to buy or sell a stock is not filled at the expected price due to market conditions. For example, if you place an order to buy 100 shares of XYZ stock at $10 per share, but XYZ stock trades at $10.05 per share by the time your order gets filled, then you have experienced 5 cents per share in price slippage. Using VWAP can help avoid situations like this because orders placed using VWAP will generally be filled closer to the VWAP price than the current market price. 

 

In conclusion, the volume-weighted average price (VWAP) is a valuable tool that day traders can use for making trading decisions. It’s important to remember that VWAP should only be one part of your overall trading strategy. It’s not a guarantee of success, and there are always risks involved with any investing or trading activities.

About the Author
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Joe Kelly

Joe Kelly is a versatile entrepreneur with a passion for day trading, product design, and real estate investing. As the creator of My Investing Club's flagship course, the Day Trading Jumpstart Accelerator, Joe has made a name for himself in the financial world since he began trading the market in 2015. Specializing in options, large cap day trading, and swing trading, Joe possesses a wealth of knowledge and experience in small cap stocks, which was his primary focus for the first five years of his trading career. This expertise has led him to mentor countless individuals, sharing his insights and strategies for success. When Joe is not busy making strides in the financial sphere, he can be found cooking up some of the most delectable steaks and smoking mouth-watering, Texas-style BBQ. A man of many talents, Joe enjoys playing guitar and woodworking in his spare time. Family and outdoor activities play a significant role in Joe's life. He loves spending quality time with his wife and children, engaging in a wide array of outdoor pursuits such as fishing, bike riding, hiking, swimming, skiing, tubing, and volleyball. Joe's enthusiasm for everything outdoors and his diverse range of interests make him a well-rounded individual, both in the professional and personal realms.