Volume Weighted Average Price (VWAP) calculates the value ratio of all trades during a given period by comparing the value traded to the total volume traded. It is useful for reactive investors and conservative investors seeking future savings. It is most effective when calculated for a full trading day or longer periods.
Volume Weighted Average Price refers to the total volume traded within a given time period, such as a single trading day. The purpose of the VWAP is to determine the value ratio associated with all trade that occurred during the quoted period. This is accomplished by comparing the value traded during the period to the total volume traded for the same time period.
For investors who tend to be more reactive than proactive in their investment approach, the volume-weighted average price can serve as an important benchmark. The formula can be applied to a wide range of values or focused on a particular value. By doing so, it is possible to ensure that any security trades made by the investor remain in line with the general volume level of the market. As a means of minimizing the chances of volatility in the investment process, the use of a volume weighted average price calculation is generally quite effective.
Using volume-weighted average price also works well when the purpose of the investment is to provide some type of future savings, such as with a pension plan. Because calculating a volume-weighted average price can help identify investment opportunities that are performing well and appear to have lower risk, the strategy is ideal for conservative investors. While the returns may not be spectacular in terms of daily earnings, the constant accumulation of value will help provide great stability to the pension plan.
Although the formula for calculating a volume-weighted average price is sometimes applied to periods of less than one day, many analysts tend to view this application as worthless. To establish a true benchmark, it is necessary to take into account the total activity between the open and close of a market day. However, the method of calculating a volume-weighted average price will work well if applied to longer periods, such as two consecutive trading days or a solid trading week.
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