<p>Volume Weighted Average Price (VWAP) is a technical indicator that calculates the average price of a security weighted by its trading <a href="/NewSite/encyclopedia/volume/" class="ency-link">volume</a> over a specific period. By giving more influence to prices traded at higher volumes, VWAP provides a benchmark that reflects the true cost of market activity rather than a simple arithmetic mean.</p>

<h2>How It Works</h2>
<p>VWAP is computed by multiplying each trade’s price by its volume, summing those products, and then dividing by the total volume traded during the chosen timeframe.</p>
<ul>
<li><strong>Formula:</strong> VWAP = Σ (Priceᵢ × Volumeᵢ) / Σ Volumeᵢ</li>
<li><strong>Typical period:</strong> Intraday, resetting at the market open; can also be applied to daily, weekly, or custom intervals.</li>
<li><strong>Calculation steps:</strong>
<ol>
<li>For each trade or price bar, record the price and the corresponding volume.</li>
<li>Multiply price by volume to get the volume‑weighted value.</li>
<li>Accumulate the volume‑weighted values and the total volume.</li>
<li>Divide the accumulated volume‑weighted sum by the total volume.</li>
</ol>
</li>
<li>The resulting VWAP line is plotted on a price chart; traders watch how the current price relates to this line.</li>
</ul>

<h2>Why It Matters</h2>
<p>VWAP serves as a reference for assessing whether a security is trading at a fair price relative to volume‑weighted market activity.</p>
<ul>
<li><strong>Institutional trading:</strong> Large funds aim to execute orders near VWAP to minimize market impact and avoid adverse price moves.</li>
<li><strong>Trend identification:</strong> When price consistently stays above VWAP, it suggests bullish sentiment; sustained trading below VWAP can indicate bearish pressure.</li>
<li><strong>Example:</strong> A trader notices that a stock’s price has risen above its intraday VWAP for the first two hours of the session. Interpreting this as buying interest, they may enter a long position, expecting the upward bias to continue unless the price falls back to or below VWAP.</li>
<li>Because VWAP incorporates volume, it filters out price moves that occur on thin trading, offering a more reliable gauge of market consensus than a simple <a href="/NewSite/encyclopedia/moving-average/" class="ency-link">moving average</a>.</li>
</ul>