Trading With VWAP and MVWAP

What Is VWAP and MVWAP?

Volume-weighted average price (VWAP) and moving volume-weighted average price (MVWAP) are trading tools that can be used by all traders to ensure they are getting the best price. However, these tools are used most frequently by short-term traders and in algorithm-based trading programs.

Understanding VWAP and MVWAP

MVWAP may be used by longer-term traders, but VWAP only looks at one day at a time due to its intraday calculation. Both indicators are a special type of price average that takes into account volume which provides a much more accurate snapshot of price action. The indicators also act as benchmarks for individuals and institutions that wish to gauge if they had good execution or poor execution on their order.

Calculating VWAP

VWAP is the average price a security has traded at throughout the day, based on both volume and price and is important because it provides traders with insight into both the trend and value of a security.

The VWAP calculation is performed by 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 minute, 5 minutes, 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 you a value called TPV.
• Keep a running total of the TPV 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 get 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 also 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 that 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 spreadsheet can be easily set up with column headings as shown in the picture below. The appropriate calculations would need to be inputted.

Attaining the MVWAP is quite simple after VWAP has been calculated. An MVWAP is basically an average of the VWAP values. VWAP is only calculated per 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 10 periods to elapse, then 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.

Application 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.

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 MVWAP indicator, they can adjust how many periods to average in the calculation. This can be done by adjusting the variable in the charting platform. Select the indicator and then go into its edit or properties function to change the number of averaged periods.

VWAP vs. MVWAP

There are a few major differences between the indicators that 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. For example, if using a one-minute chart for a particular stock, 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 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 traders know if they received a better-than-average price that day or a worse price. MVWAP does not necessarily provide this same information.

VWAP will start fresh every day. Volume is heavy in the first period after the markets 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), is less susceptible to any individual period and becomes progressively less so the more periods that are averaged.

General Strategies

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 intraday price to sell. If the price is below VWAP, it is a good intraday price to buy. However, there is a caveat to using this intraday. Prices are dynamic and 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 toward the line. The figure below shows three days of price action in the iShares Silver Trust ETF (SLV). As the price rose, it stayed largely above the VWAP and MVWAP, and declines toward the lines provided buying opportunities. As the price fell, it stayed largely below the indicators, and rallies toward the lines were selling opportunities.

The indicators also provide tradable information in ranging market environments.

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 MVWAP 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 was better than average. If the security was sold above the VWAP, it was a better-than-average sale price.

The Bottom Line

VWAP and MVWAP are useful indicators that have some differences between them. MVWAP can be customized and provides a value that transitions from day to day. VWAP, on the other hand, provides the volume average price of the day, but it 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, they get a better-than-average sale price. Similarly, traders that buy below the VWAP get a better-than-average purchase price. On trending days, attempting to capture pullbacks toward the VWAP and MVWAP can produce a profitable result if the trend continues.