The Volume Weighted Average Price (VWAP) is a trading benchmark that reflects the average price of a security, considering both its price and trading volume during a particular timeframe, typically intraday. This metric is calculated by dividing the total dollar value of all trades by the total volume traded over the same period.
Traders often use VWAP to assess current prices relative to this benchmark. For example, a trader might strategize to buy a stock when its price is below the VWAP, considering it advantageous, or sell at prices above the VWAP for perceived profitability.
In practical application, VWAP provides a point of reference to market participants for determining fair trade prices and can serve as a guide for order execution strategies, ensuring minimal market impact. It is a critical tool in the arsenal of portfolio managers and institutional traders, aligning with algorithms to enhance trading decision accuracy and efficiency.