Weighted average volume, often referred to as Volume-Weighted Average Price (VWAP), is calculated by determining the total dollar value of shares traded and dividing by the total shares traded. This provides a view of the average price a stock was traded at, weighted by its volume.
Understanding VWAP Calculation
Here's a breakdown of how to calculate VWAP, according to the provided reference:
- Step 1: Transaction Value: For each transaction within the specified period, multiply the price at which the stock was traded by the number of shares traded. This gives you the dollar value of that particular transaction.
- Step 2: Total Transaction Value: Sum up the dollar values of all transactions within the period. This gives you the total dollar value of all shares traded during that period.
- Step 3: Total Shares Traded: Sum up the total shares traded across all transactions during the same period.
- Step 4: VWAP Calculation: Divide the Total Transaction Value by the Total Shares Traded. The result is the Volume-Weighted Average Price (VWAP).
Formula and Example
The formula for calculating VWAP can be expressed as:
VWAP = (Σ (Price * Volume)) / Σ VolumeLet's illustrate with a simple example:
| Transaction | Price | Volume | Price * Volume |
|---|---|---|---|
| 1 | \$100 | 100 | \$10,000 |
| 2 | \$102 | 200 | \$20,400 |
| 3 | \$101 | 150 | \$15,150 |
- Total Transaction Value: \$10,000 + \$20,400 + \$15,150 = \$45,550
- Total Shares Traded: 100 + 200 + 150 = 450
- VWAP: \$45,550 / 450 = \$101.22
Therefore, in this example, the VWAP is approximately \$101.22.
Key Points
- VWAP is a volume-weighted average. This means that trades with higher volume have a greater impact on the final VWAP calculation.
- It's a dynamic measure that changes over time as new trades occur.
- VWAP is often used as a benchmark by traders to gauge the relative performance of their trades. If a trader's buy price is below the VWAP or sell price is above, it’s often viewed as positive trading performance.
- This metric is usually calculated intraday, but can be used over any specified period.
Practical Insights
- Large institutional investors may use VWAP as a benchmark to execute large orders without significantly impacting the market price, trying to buy below VWAP or sell above it.
- VWAP can be used to determine if a price is high or low relative to the average price of the day considering the trading volume.
