How is VWAP Used in Trading

When your computer is not loading and it just keeps lagging, don't you think it indicates something, that may be your network connection may be weak, maybe it's raining too much, or maybe the servers are slow.

What does that tell us? That even a lag can be an indicator. In finance a lagging indicator is a sign that becomes apparent only after a large shift has taken place. They cannot predict trends, but they can be used to confirm long-term trends.

Volume weighted average or VWAP price is such a lagging indicator. VWAP calculates the average price at which a security has traded throughout the specific period taking into account both price and volume. And how do traders use it, well they use it to assess the fairness of their trades relative to the prevailing market conditions. The VWAP formula is calculated by multiplying the price of each trade by its corresponding volume, summing up these values and dividing the total by cumulative volume. VWAP is typically calculated for a specific trading day or specific session within a day.

How does it work?

Traders compare the current price of a security to its VWAP to gauge whether they are buying above or below the average price. If the current price is above VWAP it may suggest bullishness while a price below VWAP may indicate bearishness. Traders often use VWAP as a reference point for executing trades with the aim of achieving a price close to the average.