What is VWAP? Definition, Formula, and Example
VWAP (Volume Weighted Average Price) is the ratio of cumulative dollar volume traded to cumulative share volume over a session, giving the average price at which every share exchanged hands weighted by transaction size, and serving as the primary execution benchmark for institutional traders.
What Is VWAP?
VWAP (Volume Weighted Average Price) is the ratio of cumulative dollar volume traded to cumulative share volume for a security over a defined period — almost always a single trading session. It represents the average price paid per share across all transactions during the day, with larger trades weighted more heavily than smaller ones. VWAP resets to zero at market open each day. Institutional trading desks use it as an execution quality benchmark; algorithmic execution systems are built to track it; and day traders use it as the primary intraday dynamic support and resistance reference.
VWAP Formula
VWAP = Σ(Typical Price × Volume) / Σ(Volume)
Where Typical Price (TP) = (High + Low + Close) / 3 for each time bar.
The calculation is cumulative, running from the open through the current bar:
VWAP_t = Σᵢ₌₁ᵗ (TPᵢ × Vᵢ) / Σᵢ₌₁ᵗ Vᵢ
Some implementations substitute the close price for the typical price; this produces slightly different values but the behavioral signal is identical.
Worked Example
TSLA opens on an average trading morning. The first three one-minute bars produce:
| Bar | Typical Price | Volume | TP × Volume |
|---|---|---|---|
| 9:30 | $175.40 | 850,000 | $149,090,000 |
| 9:31 | $176.20 | 620,000 | $109,244,000 |
| 9:32 | $175.80 | 480,000 | $84,384,000 |
VWAP at 9:32 = ($149,090,000 + $109,244,000 + $84,384,000) / (850,000 + 620,000 + 480,000) = $342,718,000 / 1,950,000 = $175.75
The current price of $175.80 sits $0.05 above VWAP, indicating the average buyer over the first two minutes of the session is slightly underwater. A sell program targeting VWAP would aim to execute as close to $175.75 as possible throughout the session.
VWAP Standard Deviation Bands: Many platforms plot ±1 and ±2 standard deviation envelopes around VWAP. These function analogously to Bollinger Bands but anchored to the session's volume-weighted mean rather than a simple moving average. Price trading between the ±1 SD bands represents roughly 68% of intraday price action.
When Traders Use VWAP
Institutional execution benchmark: Buy-side desks evaluate their trading algorithms by whether fills came in above or below VWAP. An execution below VWAP on a buy order is considered alpha-positive; paying above VWAP represents a drag. VWAP algorithms slice large orders throughout the day, concentrating volume in high-activity periods (typically the open and final hour) to minimize market impact.
Day trading trend reference: When price holds above VWAP with pullbacks finding support at the level and bouncing, the tape reflects buy-side control. Sustained trading below VWAP with each bounce failing at the level signals sell-side control. The first test of VWAP after a gap open — where price opens well above or below the prior close — is one of the highest-probability setups in intraday trading: gap-and-go trades hold above VWAP on the test; gap-fill trades recapture VWAP and continue toward the previous day's close.
Anchored VWAP (AVWAP): Instead of resetting daily, AVWAP anchors to a significant price event — an earnings release date, a 52-week high, an IPO date — and calculates forward from that point. Swing traders use AVWAP to identify whether institutional participants who bought at a major event are currently in profit or underwater, which governs whether that level acts as support or resistance.
Limitations and Common Misconceptions
VWAP is purely backward-looking — it describes executed transactions, not future price direction. In the first 30 minutes of trading, thin cumulative volume means a single large print moves VWAP substantially, making early-session readings statistically unstable. The "price above VWAP is bullish" rule breaks down during strong pre-market gap-ups, where VWAP opens well below price and provides no meaningful reference for the first hour. VWAP cannot be applied meaningfully to weekly or monthly charts in standard form, since it resets each session; practitioners use AVWAP with relevant event anchors instead.