Volume weighted average price (VWAP) and moving volume weighted average price (MVWAP) are trading tools that can be used by all traders. However, these tools are used most frequently by short-term traders and in algorithm based trading programs.
TUTORIAL: Chart Analysis
MVWAP may be used by longer term traders, but VWAP only looks at one day at a time due to its intra-day calculation. Both indicators are a special type of price average which takes into account volume; this provides a much more accurate snapshot of the average price. The indicators also act as benchmarks for individuals and institutions who wish to gauge if they got good execution or poor execution on their order. (For a primer, see Weighted Moving Averages: The Basics.)
The VWAP calculation is performed by the charting software and displays an overlay on the chart representing the calculations. This display takes the form of a line, similar to other moving averages. How that line is calculated is as follows:
- Choose your time frame (tick chart, 1 min, 5 min, etc.)
- Calculate the typical price for the first period (and all periods in the day following). Typical price is attained by taking adding the high, low and close, and dividing by three: (H+L+C)/3
- Multiply this typical price by the volume for that period. This will give us a value called TP*V.
- Keep a running total of the TP*V values, called cumulative TPV. This is attained by continually adding the most recent TPV to the prior values (except for the first period, since there will be no prior value). This figure should always be getting larger as the day progresses.
- Keep a running total of cumulative volume. Do this by continually adding the most recent volume to the prior volume. This number should only get larger as the day progresses.
- Calculate VWAP with your information: cumulative TPV/cumulative volume. This will provide a volume weighted average price for each period and will provide the data to create the flowing line which overlays the price data on the chart.
It is likely best to use a spreadsheet program to track the data if you are doing this manually. A spread sheet can be easily set up.
|Figure 1: Spreadsheet Headings|
|Source: Microsoft Excel|
The appropriate calculations would need to be inputted.
Attaining the MVWAP is quite simple after VWAP has been calculated. A MVWAP is basically an average of the VWAP values. VWAP is only calculated each day, but MVWAP can move from day to day because it is an average of an average. This provides longer-term traders with a moving average volume weighted price.
If a trader wanted a 10 period MVWAP, they would simply wait for the first ten periods to elapse and then would average the first 10 VWAP calculations. This would provide the trader with the MVWAP that starts being plotted at period 10. To continue getting the MVWAP calculation, average the most recent 10 VWAP figures, include a new a VWAP from the most recent period and drop the VWAP from 11 periods earlier.
Apply to Charts
While understanding the indicators and the associated calculations is important, charting software can do the calculations for us. On software that does not include VWAP or MVWAP, it may still be possible to program the indicator into the software using the calculations above. (For related reading, see Tips For Creating Profitable Stock Charts.)
By selecting the VWAP indicator, it will appear on the chart. Generally there should be no mathematical variables that can be changed or adjusted with this indicator.
If a trader wishes to use the Moving VWAP (MVWAP) indicator, she can adjust how many periods to average in the calculation. This can be done by adjusting the variable in our charting platform. Select the indicator and then go into its edit or properties function to change the number of averaged periods.
Differences between VWAP and MVWAP
There are a few major differences between the indicators which need to be understood.
VWAP will provide a running total throughout the day. Thus, the final value of the day is the volume weighted average price for the day. If using a one minute chart, there are 390 (6.5 hours X 60 minutes) calculations that will be made for the day, with the last one providing the day's VWAP.
MVWAP on the other hand will provide an average of the number of VWAP calculations we wish to analyze. This means there is no final value for MVWAP as it can run fluidly from one day to the next, providing an average of the VWAP value over time.
This makes the MVWAP much more customizable. It can be tailored to suit specific needs. It can also be made much more responsive to market moves for short-term trades and strategies or it can smooth out market noise if a longer period is chosen.
VWAP provides valuable information to buy and hold traders, especially post execution (or end of day). It lets the trader know if they received a better than the average price that day or if they received a worse price. MVWAP does not necessarily provide this same information. (For more, see Understanding Order Execution.)
VWAP will start fresh every day. Volume is heavy in the first period after the market open; therefore, this action usually weighs heavily into the VWAP calculation. MVWAP can be carried from day to day, as it will always average the most recent periods (10 for example) and is less susceptible to any individual period - and becomes progressively less so the more periods which are averaged.
When a security is trending, we can use VWAP and MVWAP to gain information from the market. If the price is above VWAP, it is a good intra-day price to sell. If the price is below VWAP, it is a good intra-day price to buy. (For additional reading, see Advantages Of Data-Based Intraday Charts.)
There is a caveat to using this intra-day though. Prices are dynamic, so what appears to be a good price at one point in the day may not be by day's end.
On upward trending days, traders can attempt to buy as prices bounce off MVWAP or VWAP. Alternatively, they can sell in a downtrend as price pushes up towards the line. Figure 2 shows three days of price action in the iShares Silver Trust ETF (SLV). As the price rose, it stayed largely above the VWAP and MWAP, and declines to the lines provided buying opportunities. As price fell, they stayed largely below the indicators and rallies toward the lines were selling opportunities.
|Figure 2: SLV with MVWAP (20) and VWAP in trending market, 10 minute chart|
The indicators also provide tradable information in ranging market environments.
|Figure 3. SLV with MVWAP (20) and VWAP in ranging market, 10 minute chart|
On ranging days traders can buy as price crosses above VWAP/MVWAP and sell as price crosses below VWAP/MVWAP for quick trades. This method runs the risk of being caught in whipsaw action.
Alternatively a trader can use other indicators, including support and resistance, to attempt to buy when the price is below the VWAP and MWAP and sell when the price is above the two indicators.
At the end of the day, if securities were bought below the VWAP, the price attained is better than average. If the security was sold above the VWAP, it was a better than average sale price.
MVWAP and VWAP are useful indicators that have some differences between them. MVWAP can be customized and provides a value which transitions from day to day. VWAP, on the other hand, provides the volume average price of the day, but will start fresh each day. MVWAP can be used to smooth data and reduce market noise, or tweaked to be more responsive to price changes. If a trader sells above the daily VWAP, he gets a better than average sale price. If he buys below the VWAP, he gets a better than average purchase price. On trending days, attempting to capture pullbacks towards the VWAP and MVWAP can produce profitable result if the trend continues. (For related reading, also take a look at Pinpoint Winning Trade Entries With Filters And Triggers.)