VWAP – An essential tool for identifying entry and exit points in trading

Why Do Traders Care About VWAP?

When you look at a price chart, trading volume is the most overlooked source of information. Indicators like RSI, MACD, or Bollinger Bands can help you identify momentum, but they do not account for actual volume – a key factor that professional traders consider essential.

VWAP (Volume Weighted Average Price) is the bridge between price action and volume. Instead of just looking at closing prices, VWAP calculates the average price at which actual trades have occurred based on volume. This makes it an extremely useful tool for both short-term traders and institutional investors.

What Is VWAP – Definition and Practical Significance

VWAP stands for Volume Weighted Average Price. It tells you the average price at which an asset has traded over a specific period, taking into account the volume of each trade.

Imagine you are a trader needing to buy 1 million units of an asset. You can’t buy it all at once because it would impact the market price. VWAP helps you find a “fair” price based on the market activity that has occurred. If you buy below the VWAP, you are getting a good price. If you buy above the VWAP, you are paying a higher-than-average price.

How to Calculate VWAP – Formula and Step-by-Step Process

On trading platforms, VWAP is calculated automatically. However, understanding the formula will help you use it more effectively: