VWAP in Share Market

August 31, 2023

VWAP In Share Market

VWAP is a key stock market trading benchmark. It shows the average price at which a certain stock has been traded over a certain amount of time based on the number of shares that have been traded. 

Content :

VWAP Full Form

The full form of VWAP is Volume Weighted Average Price. It’s a widely used trading benchmark that gives traders a snapshot of the average price at which a security has traded throughout the day based on both volume and price. It’s particularly useful for institutional investors who wish to trade large amounts of certain security without disturbing the market price.

In the stock market, VWAP is significant because it provides insight into the market trend and liquidity. For example, if a security’s price is above the VWAP line, it’s considered a bullish signal, while if it’s below, it’s seen as bearish.

VWAP Formula

The VWAP formula is given by the sum of the volume of each transaction multiplied by the price of each transaction, divided by the total volume of all transactions. To break this down, the formula can be expressed as:

  1. Calculate the Typical Price for each period: (High + Low + Close) / 3
  2. Multiply the Typical Price by the Volume for that period: Typical Price * Volume
  3. Keep a running total of these values: Cumulative (Typical Price * Volume)
  4. Keep a running total of volume: Cumulative Volume
  5. Divide the value from step 3 by the value from step 4: VWAP = Cumulative (Typical Price * Volume) / Cumulative Volume

Consider a stock with the following 3 trades: Trade 1: Price Rs 100, Volume 1000 shares, Trade 2: Price Rs 101, Volume 1500 shares, and Trade 3: Price Rs 102, Volume 1800 shares. The VWAP is calculated as ((100*1000)+(101*1500)+(102*1800)) / (1000+1500+1800), which gives a VWAP of Rs 101.23.

VWAP Strategy

The VWAP strategy is a popular method among traders to identify the market trend and make informed trading decisions. The basic principle is to buy when the price is below the VWAP and sell when the price is above it. This strategy aims to minimize market impact and outperform the VWAP benchmark.

  • Long Strategy: If the price of a stock falls below the VWAP line, it indicates that the stock is undervalued, and it may be a good time to buy.
  • Short Strategy: If the price is above the VWAP line, the stock is overvalued, and it might be an opportunity to short sell.
  • Reversion Strategy: If the price deviates significantly from the VWAP line but tends to revert back, traders can buy when the price is below VWAP and sell when it is above, profiting from the price reversion.

Consider the recent trend of Reliance Industries in the Indian stock market. If the price falls below the VWAP line and the overall market trend is bullish, it would be a potential buying opportunity for traders.

How To Use VWAP

To use VWAP in trading, you need to follow these steps:

  • Choose a trading platform that supports VWAP: Many online trading platforms, like Alice Blue.
  • Select the stock: Choose the stock you wish to analyze and select a suitable time frame for the chart.
  • Apply VWAP: Apply the VWAP indicator to the chart.
  • Analyze the chart: If the stock price is below the VWAP line, it might be undervalued and a potential buying opportunity. Conversely, if the price is above VWAP, the stock may be overvalued, and it might be an opportunity to sell or short sell.
  • Monitor continuously: VWAP is a dynamic indicator and changes with every new transaction. So, it’s important to continuously monitor the price movement relative to VWAP throughout the trading day.

We hope that you are clear about the topic. But there is more to learn and explore when it comes to the stock market, and hence we bring you the important topics and areas that you should know:

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Roe Vs Roce
What is gold etf
Etf vs stock
How to buy etf
What is Corporate Action?
India Vix
Types Of Hybrid Funds

VWAP In Share Market – Quick Summary

  • VWAP stands for Volume Weighted Average Price, which provides the average price a stock has traded at throughout the day, based on both volume and price.
  • The formula for VWAP is the sum of the volume of each trade multiplied by the trade price, divided by the total volume traded for the day.
  • The VWAP strategy is a popular tool among traders, which involves buying when the price is below the VWAP line and selling when the price is above it.
  • Traders can use VWAP on online trading platforms like Alice Blue by selecting the stock, applying the VWAP indicator, and analyzing the chart continuously.
  • While VWAP can be a great tool for intraday traders, it should be used in conjunction with other market analysis tools for the best results.
  • Invest in stock market with Alice Blue’s direct platform at no cost. They are offering 15 Rs brokerage plan, by which you can save up to ₹ 1100 brokerage every month when compared to other brokers. They also don’t levy clearing charges. 

VWAP In Share Market – FAQs  

What Is VWAP In The Stock Market?

VWAP in the stock market refers to the Volume Weighted Average Price, which provides an insight into the average price at which a particular stock has been traded throughout the day. It takes into account both the volume of shares traded and the price at which these trades have occurred. VWAP is particularly significant for intraday traders as it helps them to determine the market trend and make informed trading decisions.

Is VWAP a good indicator?

VWAP can be an extremely useful indicator for intraday traders. It provides a fair price at which a stock has traded throughout the day, taking volume into consideration. By comparing the current price to VWAP, traders can assess whether a stock is overvalued or undervalued. However, like any other technical indicator, VWAP should be used in conjunction with other analysis tools for more accurate predictions.

How do you read a VWAP indicator?

  • VWAP appears as a single line on the trading chart, similar to a moving average.
  • If the current market price is above VWAP, the stock may be overvalued. If it’s below, the stock may be undervalued.
  • As a lagging indicator, VWAP trends can help anticipate potential price moves.

Why do traders use VWAP?

  • VWAP provides a comprehensive overview of a stock’s performance, considering both price and volume.
  • It helps traders identify potential buying or selling opportunities.
  • Institutional traders use VWAP as a benchmark to assess their trading efficiency.

Which indicator is best for day trading?

While VWAP is a valuable indicator for day trading, the choice of indicator can depend on a trader’s specific strategy and goals. Some of the widely used ones include:

  • Moving Average Convergence Divergence (MACD)
  • Relative Strength Index (RSI)
  • Bollinger Bands and 
  • Stochastic Oscillator.

What is the best time frame for VWAP?

VWAP is primarily an intraday indicator, meaning it resets daily and is most useful for day traders. The data for VWAP is calculated and plotted for the day, which makes it less applicable for longer time frames. For day trading, one-minute to fifteen-minute charts are often used in conjunction with VWAP. It’s also noteworthy that VWAP can be particularly useful during the first and last hour of trading when volume is typically at its highest.

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