Volume Weighted Average Price (VWAP)

Overview

The Volume Weighted Average Price (VWAP) represents the average price at which a security has traded throughout the day, weighted by volume. Unlike simple moving averages that treat all prices equally, VWAP gives more significance to price levels with higher trading volume, making it a true reflection of market activity. This indicator appears as a single smooth line on intraday charts and serves as both a trading benchmark and a dynamic support/resistance level.

The calculation involves multiplying each traded price by its corresponding volume, creating a cumulative total of these products, and dividing by the cumulative volume. The formula is: VWAP = Σ(Typical Price × Volume) / Σ(Volume), where Typical Price = (High + Low + Close) / 3. This calculation resets at the beginning of each trading session, making VWAP particularly valuable for day traders and institutional investors who use it to gauge execution quality and identify optimal entry and exit points.

Interpretation & Trading Signals

Trend Identification:

  • Price Above VWAP: Bullish intraday trend - buyers in control
  • Price Below VWAP: Bearish intraday trend - sellers dominating
  • Price Crossing VWAP: Potential trend change or momentum shift
  • Price Oscillating Around VWAP: Sideways market, range-bound conditions

Trading Strategies:

  • VWAP Breakout: Enter long when price breaks above VWAP with volume
  • VWAP Bounce: Buy when price bounces off VWAP from above (support)
  • Mean Reversion: Fade extreme moves away from VWAP, expecting return
  • Pullback Entry: Buy retracements to VWAP in uptrends

Institutional Trading:

  • Buy Below VWAP: Institutions aim to accumulate below VWAP for better fills
  • Sell Above VWAP: Large traders distribute positions above VWAP
  • Execution Benchmark: VWAP used to measure trading performance
  • Fair Value Reference: Price near VWAP considered fairly valued intraday

Example Usage

Code examples will be available once the Rust implementation is complete.

Performance Analysis

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