| The Volume Weighted Average Price (VWAP) of a | | | | by software firms as it is easier to maintain in the |
| stock, in basic terms, is the "average" price of the | | | | database and prevents the overall software from |
| stock relative to the amount of volume it has traded | | | | running slower than optimal speed. It uses the last |
| during the day. With greater emphasis on monitoring | | | | value of VWAP as the basis for calculating the |
| VWAP due to algorithms impacting intraday trading | | | | VWAP on the next trade. Using the same example |
| activities, you might be surprised to learn that many | | | | as above: |
| day trading software firms do not use a standardized | | | | - 1st Iteration: (20.05 x 1000) / 1000 = 20050 / 1000 |
| calculation of VWAP! While both calculations will | | | | = $20.05 |
| produce similar results, you may wish to contact your | | | | - 2nd Iteration: $20.05 + {(20.06 - 25.05) x 800)} / |
| day trading software firm to ask which VWAP | | | | (1000 + 800) = 20.0544 |
| calculation they use if your day trading style warrants | | | | - 3rd Iteration: 20.0544 + {(20.04 - 20.0544) x 100} / |
| monitoring VWAP. Chances are that the | | | | (1800 + 100) = 20.0536 |
| representative on the other end of the line may not | | | | - 4th Iteration: 20.0536 + {(20.03 - 20.0536) x 2000) |
| know which calculation is used, so be prepared to | | | | (1900 + 2000) = 20.0311 |
| wait a few hours (or even days!) before you get an | | | | - 5th Iteration: 20.0311 + {(20.03 - 20.0311) x 3000) / |
| answer. | | | | (3900 + 3000) = 20.0306 |
| The "cumulative" VWAP is considered to be the | | | | Of course, as more trades (iterations) are made the |
| "most accurate" calculation as it changes with every | | | | closer the two VWAP calculations will become. With |
| transaction. The formula is: | | | | each symbol having several hundred (or several |
| The Sum of all transactions' (Volume in shares x Price | | | | thousand) transactions each day, this should not be a |
| traded) divided by the Cumulative Volume. For | | | | great concern for most day traders. If you happen |
| example, let's say the stock has 5 trades on the day | | | | to monitor the VWAP for VERY thinly-traded |
| so far: | | | | symbols - with trades happening only a few times a |
| - $20.05 1000 shares | | | | day - consider asking your day trading software firm |
| - $20.06 800 shares | | | | which method they use to calculate VWAP. This is |
| - $20.04 100 shares | | | | simply so that you know how to monitor the trade |
| - $20.03 2000 shares | | | | activity and you then can make any necessary |
| - $20.03 3000 shares | | | | adjustments to your trading execution methods. |
| The VWAP would be: | | | | You also may wish to talk with your day trading |
| {($20.05 x 1000) + ($20.06 x 800) + ($20.04 x 100) | | | | software firm about other VWAP nuances such as if |
| + ($20.03 x 2000) + ($20.03 x 3000)} / (1000 + 800 | | | | they count pre-market trades in the VWAP |
| + 100 + 2000 + 3000) | | | | calculation. Find out if you have the ability to plot |
| This translates into: | | | | VWAP on intraday charts alongside indicators such as |
| (20050 + 16048 + 2004 + 40060 + 60090) / (6900) | | | | moving averages. These nuances will give you the |
| = 20.0365. Therefore $20.0365 would be the | | | | best odds of maximizing your day trading software |
| "Cumulative VWAP" | | | | to help you with your VWAP-related trading. |
| The "iterative" VWAP calculation is sometimes used | | | | |