Indicator Formula

Technical Details — Volume-Weighted Average Price (VWAP)

Overview

The Volume-Weighted Average Price (VWAP) calculates the average price weighted by volume over a specified period. Prices with higher volume have more influence, making VWAP reflect the “true” average price that the market traded at.

Mathematical Derivation

Step 1 — Calculate Typical Price × Volume

Purpose: Weight each price by its volume.

$$TV[t] = TypicalPrice[t] \times Volume[t]$$

Where:

$$TypicalPrice$$ = (High + Low + Close) / 3
$$Volume$$ = Trading volume for the period

What This Measures: Volume-weighted contribution of each bar

Step 2 — Calculate VWAP

Purpose: Sum weighted prices and divide by total volume.

$$VWAP[t] = \frac{\sum_{i=0}^{n-1} TV[t-i]}{\sum_{i=0}^{n-1} Volume[t-i]}$$

Where:

$$n$$ = Period

What This Measures: Volume-weighted average — the fair value price based on actual trading activity

Compact Formula Summary

$$VWAP[t] = \frac{\sum TypicalPrice[i] \times Volume[i]}{\sum Volume[i]}$$

Default Parameter: Period (n) = 14

Complete Calculation Example

Three bars with prices [44, 45, 46] and volumes [100, 300, 100]:

$$VWAP = \frac{44×100 + 45×300 + 46×100}{100+300+100} = \frac{22500}{500} = 45.00$$

Note: SMA would be 45.00, but if volumes were [100, 100, 300], VWAP = 45.40 — volume shifts the weight.

Key Takeaways from the Example

Volume-Informed: Unlike price-only MAs, VWAP incorporates trading volume data
Institutional Reference: VWAP is widely used by institutional traders as a benchmark price
Fair Value Indicator: Price above VWAP = buyers in control, below = sellers in control
Requires Volume Data: Only works on assets with reliable volume data (not forex spot)