<\/p>\nSimple moving average calculations assign an equal weight to trade prices at constant time intervals. Volume Weighted Average Price (VWAP) is an average price calculation that assigns value to trade volume rather than trade time. For example, if 5 contracts trade at a price of 50 then one more trades at 56, the Volume Weighted Average Price is 51.<\/p>\n
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However, if the 5 contracts at a price of 50 traded during one minute and the 1 contract at a price of 56 traded during the next minute, the simple moving average would give equal weight to the two prices and result in an average price of 53. This exemplifies the major shortcoming of intraday moving averages, which is that they give equal weight to every time bar, regardless of volume traded. Is a test of a resistance level during thinly traded overnight hours as important as the same price movement right after a report is released? No. Volume Weighted Average Price avoids overvaluing low volume periods and undervaluing high volume periods to provide a more relevant average traded price.<\/p>\n
Exchanges will often use Volume Weighted Average Price to determine settlement values. <\/p>\n
Volume Weighted Average Price is a valuable tool when used in conjunction with other indicators. Its nature as a lagging indicator means it is not well suited to use as a stand-alone signal generator. Due to the fact that it generally resets at the start of each trading session it is best used for intraday trading.<\/p>\n
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