VWAP Explained: Formula, Calculation and How Traders Use It
VWAP, the volume-weighted average price, is the average price of all trades over a period, each price weighted by the volume traded at it. It resets at the start of each session and shows the average price paid by everyone who traded that day.
Intermediate · 9 min read · Updated
What you will learn
Calculate VWAP by hand, explain why institutions use it and read it without overinterpreting it.
Read first: Bid, Ask and Spread: How Prices Are Quoted and What They Cost
The formula
VWAP = Σ(price × volume) ÷ Σ(volume), summed from the start of the session. On bar charts, the price of each bar is often approximated by its typical price, (high + low + close) ÷ 3; with tick data, each trade is used at its exact price.
Hypothetical example · VWAP after three bars
Bar 1: typical price 100.57, volume 900. Bar 2: 101.27, volume 700. Bar 3: 101.87, volume 650. VWAP = (100.57 × 900 + 101.27 × 700 + 101.87 × 650) ÷ 2,250 ≈ 101.16. Bar 1, with the most volume, pulls the average towards its price.
Why institutions watch it
Large orders are often measured against VWAP: an execution desk that buys below the day’s VWAP has, on average, paid less than the market. Because of that, VWAP is a common benchmark for executing big orders over a session, and many algorithms aim to trade close to it. This is a reason traders watch the line; it does not mean price must react to it.
Reading VWAP on a chart
- Price above VWAP: buyers of the day are, on average, in profit; below, they are at a loss.
- A flat VWAP with price crossing it repeatedly suggests a balanced, rotational session.
- A steadily rising VWAP with price above it suggests a directional session.
Standard deviation bands, calculated with the same volume weighting, show how far price is from the average relative to the session’s dispersion. The free TEVO VWAP draws the session, weekly, monthly and anchored VWAP with these bands in NinjaTrader 8.
Limits
- VWAP is an average: it lags, especially late in the session when a lot of volume is already included.
- It is not a support or resistance level by nature; any reaction is an observation to test, not a rule.
- Bar-based VWAP differs slightly from tick-based VWAP; use the same method when you compare levels.
- For overnight futures sessions, decide whether your VWAP starts at the electronic session open or at the regular session open, and keep that choice.
Standard deviation bands, worked through
Bands measure the volume-weighted dispersion of prices around VWAP: σ = √(Σ volume × (price − VWAP)² ÷ Σ volume).
Hypothetical example · Bands after three bars
With the three bars above and a VWAP of 101.16, the deviations of the typical prices are −0.593, +0.107 and +0.707. Squared and weighted by volume: 900 × 0.352 + 700 × 0.011 + 650 × 0.500 ≈ 649. Divided by 2,250 that gives about 0.289, and its square root σ ≈ 0.54. The first bands sit at 101.16 − 0.54 = 100.62 and 101.16 + 0.54 = 101.70.
Bands widen when prices spread out and narrow in quiet sessions. Price outside the second band is unusual for that session, which is a description of the day so far, not a forecast of a return to the average.
Common mistakes
- Buying every touch of VWAP without context.
- Comparing a VWAP calculated from a different session start.
- Forgetting that early in the session VWAP rests on very little volume and moves a lot.
The next lesson shows the anchored version, which starts from an event you choose instead of the session open.
Practice exercise
On a 5-minute chart, export the high, low, close and volume of the first six bars of a session. Calculate the VWAP after each bar with a spreadsheet, then compare it with the VWAP of your platform. Explain any difference.
Check your understanding
1. What does VWAP weight each price by?
- Time
- Volume traded
- Number of trades
Show the answer
Answer: Volume traded. Each price counts in proportion to the volume traded at it.
2. Two bars: 100 with volume 300, 110 with volume 100. What is the VWAP?
- 102.5
- 105
- 107.5
Show the answer
Answer: 102.5. (100 × 300 + 110 × 100) ÷ 400 = 102.5.
3. Why do execution desks use VWAP?
- It predicts the close
- It is a benchmark for the average price paid during the session
- It is set by the exchange
Show the answer
Answer: It is a benchmark for the average price paid during the session. Buying below VWAP means paying less than the market on average.
Practise with the free tools
Frequently asked questions
Does VWAP work on daily charts?
Session VWAP is built for intraday charts. For longer periods, weekly, monthly or anchored VWAP are used instead.
Is VWAP the same as a moving average?
No. A moving average weights each bar equally over a rolling window; VWAP weights by volume from a fixed starting point.
Why is my VWAP different from another platform’s?
Different session starts, bar-based versus tick-based calculation, or different data can all change the value slightly.
Related lessons
References and further reading
- Order Flow Volumetric Bars (NinjaTrader 8 Help Guide) — NinjaTrader
- Time & Sales (NinjaTrader 8 Help Guide) — NinjaTrader
- E-mini Nasdaq-100 futures contract specifications — CME Group
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