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Understanding VWAP: What Does Volume Weighted Average Price Tell Traders?
The Foundation of Technical Analysis
When analyzing financial markets, traders rely on various tools to make informed decisions. Momentum indicators like RSI and MACD capture market strength, while tools such as Fibonacci Retracement and Bollinger Bands help identify key support and resistance levels. Yet one fundamental element often underpins all these approaches: trading volume.
The full form of VWAP—Volume Weighted Average Price—represents a powerful fusion of two critical market metrics. By merging price action with trading volume data, VWAP provides traders with actionable insights that individual metrics cannot deliver alone. This indicator serves dual purposes: confirming existing trends and pinpointing optimal entry and exit opportunities. Understanding how to leverage VWAP can significantly enhance your trading strategy.
The Mechanics: How Volume Weighted Average Price Works
The VWAP full form explains its core function: calculating an asset’s average price while giving weight to trading volume. Unlike simple price averages, VWAP recognizes that transactions occurring with higher volume should carry more significance than low-volume trades.
The calculation follows this formula: