What is a volume-weighted average indicator?
Key Takeaways
● Volume-Weighted Average Price(VWAP) measures the average asset price weighted by the total trading volume.
● VMAP is usually used on intraday charts.
● The current stock price is on the rise if it moves above the VMAP.
Understanding VWAP
Volume-Weighted Average Price (VWAP) is a technical analysis tool to weight the average asset price by the total trading volume.
How to calculate VWAP
The basic formula for VWAP is as follows:
VWAP = ∑ (Typical Price * Volume) / ∑ Volume
Here, Typical Price = (High Price + Low Price + Closing Price) / 3.
How to use VMAP
VMAP is usually used on intraday charts to ascertain the basic intraday price moves.
VMAP is similar to SMA (Simple Moving Average).
When the stock price moves above the VMAP, it sends a bullish signal, where the current stock price is on the rise.
By contrast, when the stock price falls and moves below the VMAP, it suggests that the stock is in a downtrend.
Summary
VAWP reflects the average asset price relative to the trading volume within a specific time period.
As a lagging indicator, however, VAWP is unable to predict future prices.
As a result, many investors use it to analyze intraday trading.