VWAP: average cost of the day

The golden line passing through the candles in the hourly chart above is the VWAP (volume-weighted average price). If you look closely, you'll see the line jumps next to the price at the beginning of each day: VWAP resets at the start of each trading day and is recalculated with that day's trades.

A regular moving average gives equal weight to the closing price of each candle. VWAP, however, gives more weight to prices that are traded heavily. If a stock traded mostly at 100 lira during the day, and only briefly went up to 110, the VWAP will remain close to 100; because most of the money changed hands around 100. This is why VWAP is seen as the average cost for those entering the market that day.

The importance of this average cost is psychological. If the price is above the VWAP, most of those who bought that day are in profit; buyers are comfortable, sellers are squeezed. If the price is below the VWAP, the situation reverses. Large institutional investors also frequently measure the quality of their intraday purchases against the VWAP: if they bought below the VWAP, they made a good purchase. This is why reactions are often seen when the price returns to the VWAP during the day.

VWAP is an intraday indicator. On a daily or weekly chart, since each candle already represents a full day, VWAP has nothing new to tell. It is most meaningful in hourly and smaller timeframes.

Since VWAP is calculated with few trades at the beginning of the day, it is very close to the price and volatile in the first hours. As the day progresses, more volume accumulates and the line stabilizes; the afternoon VWAP is a more reliable reference than the morning one.