Volume Weighted Average Price (VWAP) Definition Online | Espresso

Volume Weighted Average Price (VWAP) - An Overview

There is no dearth of jargon in online share trading, ranging from ones that cause new traders and investors to scratch their heads to ones that confuse even seasoned ones. Amongst the terms unique to share trading is Volume Weighted Average Price, which is commonly referred to as VWAP.

Published on 17 February 2023

At first glance, VMAP may appear to be a complex concept, but a closer look can make it easier to comprehend what it means and how it is applied in share trading in India. Here's a crash course on VMAP in stock trading.

What Is Volume Weighted Average Price in Share Trading?

Volume Weighted Average Price is the average price of a particular security with respect to its volume. Therefore, unlike a standard average price that offers you an insight into the movement patterns of a security's price over a specific period, VMAP paints a more comprehensive picture by also informing you about the corresponding volume traded.

To understand VWAP in stock trading, let's use an example from your daily life. Do you remember how your annual school report cards comprised the average percentage of marks obtained for each term exam whilst also providing information on your aggregate or weighted percentage for the academic year?

A Volume Weighted Average Price is to a stock's price for a given period what your weighted average marks were to you for an academic year. A VMAP in stock trading represents the performance of a stock with respect to its average price and demand during a certain period.

Therefore, the application of a Volume Weighted Average Price for a stock nullifies the transient fluctuations that are second nature to stock prices and allows you to understand the average performance of a stock.

How is Volume Weighted Average Price Calculated?

The approach to the calculation of Volume Weighted Average Price for a stock in share trading is simple. VMAP in stock trading is computed using the following formula:

 Volume Weighted Average Price = {Cumulative (Price*Volume)} / {Cumulative Volume}

The Volume Weighted Average Price for a stock sheds light on a stock's average price and helps traders and investors alike to determine their positions regarding said stock. Ideally, you should take a long position on a stock when its current market price is below its online VMAP and a short position when the opposite is the case.
Also Read: What are Cumulative Preferences Shares?

What is a Moving Volume Weighted Average Price?

A VMAP in stock trading is usually computed for short periods, covering a stock's performance vis-a-vis price and volume over a few minutes or hours. Therefore, the utility of an online VMAP in share trading is mostly for intra-day trading.

However, the tool of online VMAP can also be utilised to guide you in your long-term investment strategy. That's where a moving VMAP comes into the picture. If a Volume Weighted Average Price is akin to your end-of-year aggregate percentage, you can think of a moving VMAP as the visual representation of your percentages over consecutive academic years, painting a linear picture of your scholastic performance.

A moving VMAP is a graphical representation of the end-of-day Volume Weighted Average Prices for a particular stock over a period. You can simply follow the slope of the line to ascertain whether a stock is growing in terms of both price and demand and is worth your interest and investment.

How To Use Volume Weighted Average Price In Stock Trading?

It is easy to interpret Volume Weighted Average Price to decide your prospective position for a particular security. Here's how you can apply this tool in share trading.

Ideal Trade Positions with the Application of Volume Weighted Average Price:

 Ideal trading or investment position The slope of Volume Weighted Average Price for a stock 📈 (Positive slope) Long position 📉 (Negative slope) Short position

In Conclusion

As is the case with all averages, a Volume Weighted Average Price is a simple yet useful tool that represents not only a stock's average price over a certain period but also its corresponding demand. With its easy interpretation, you can make informed trading and investment decisions in share trading.