You cannot rely on luck if you want to be successful in day trading. The market is constantly changing as the trading days go by; If you cannot double your earnings within a specified period of time, you are not likely to make a solid profit.
If you want to be among the many successful and wealthy traders, you will need to learn how to analyze and act on the intraday charts!
Active traders use many different metrics – such as the purchase price and the adjusted price – to analyze and select stocks; One such technical indicator is VWAP (Volume Weighted Average Price).
Although the term itself sounds complex, this basic metric is relatively easy to calculate. By the end of this article, you will know how to calculate stock VWAP!
What is the volume weighted average price?
Volume Weighted Average Price is a technical indicator that helps traders track the intraday price trend. Typical price is calculated using the data value for the whole day (high, low and closing price).
Similarly, VWAP is generally calculated using trading volumes and price action from a specific time period. This data can be collected over the course of an entire day or in a matter of minutes! The process starts the same way as typical price calculations but adds a few extra steps at the end.
Many experts recommend against using VWAP when trying to analyze trends over multiple trading days. The equation is more effective when used for short-term calculations.
Who uses VWAP?
Individual traders often use both traditional VWAP (including all market hours) and fixed (time-bound) VWAP. VWAP is especially useful for day traders, who can analyze the price of trades to find the most suitable price to buy/sell.
This technical indicator is also used by institutional traders, such as mutual funds. Since these institutions often buy/sell thousands of shares, they can easily influence the current price of the asset. Fortunately, analyzing VWAP accounts can help avoid doing this.
Buying without VWAP or selling above VWAP are two ways to reduce the impact of large trades on the market. Although it is not always possible, companies generally try to do so when possible.
Learn more about technical analysis
Investors Underground is an online educational community worth checking out if you are interested in learning the technical details and ins of day trading. Her trading strategy mainly focuses on using volume-weighted average price to anticipate trades. However, they also incorporate many other useful technical indicators – such as the Relative Strength Index (RSI) and Moving Average Inverse Divergence (MACD) – into their calculations!
So now you know the volume-weighted average price (and how it differs from a typical price), but you’re probably wondering how to calculate it. Let’s take a look using the example VWAP account shown below!
To get started, we’ll need to choose a time period for our account. This could be a matter of minutes, hours, or the whole day. Just say the time period is five minutes (out of six hours so far) for this example.
Looking at the data from this time period, we see a wide price range for stock “X”:
- 450 dollars high
- Low $130
- Closing $320
We’ll add these values together, leaving us with $900. Next, we’ll divide this number by 3, which will get you $300 (the average price).
Now, we have to look at the size. Over the past five minutes, there have been 50 trades. However, there have been 8,000 deals in the past six hours!
Take 300 from earlier, and multiply it by the size of the interval during the time period we analyzed (50 trades, five minutes). This comes to 15,000. Finally, divide this number by the cumulative volume (8000). We have determined that VWAP is 1.875!
Volume Weighted Average Price: Summary
Confused by the above section? Here’s a simple equation to help you figure it out! Just remember that:
- separator size is the total number of trades from A specific time period that you are analyzing.
- cumulative volume is the total number of trades from A full trading session.
Volume Weighted Average Price: Summary
For both individual and institutional investors, using daily VWAP accounts can be very beneficial to implement a successful trading strategy. Fortunately, many technical analysis tools are able to calculate traditional VWAP and other metrics, simplifying the entire algorithmic trading process. This means that traders do not need to waste precious seconds in performing calculations manually.
Although VWAP is very similar to the typical rate, it does provide the advantage of time information. It is this trait that makes it invaluable to day traders, who must make the most of every second if they want to enjoy great returns. If you’re not already using VWAP accounts, it’s time to get started: potential earnings are waiting!