Volume-Weighted Average Price (VWAP) is a trading algorithm based on a pre-computed schedule to execute a large order in order to minimize any impact on the market price.

Let’s say you want to buy 15 million shares of Apple (or 1000 btc) which is almost half its average daily volume.  You can’t buy them all at once because this would impact the market and cause the price to rise.

What you need to do is to split the order into small pieces and execute them without impacting the market.  Doing this manually would be ludicrous, and that’s where en execution algo like VWAP comes in.

VWAP is also thought of as a measure of the average price at which an asset is traded over a given period of time.

To calculate VWAP, you use the following equation:

VWAP = ∑(amount of asset bought x asset price)/total shares bought that day.

The standard VWAP is calculated using all of the orders of a given trading day, but it can also be used to look at multiple time frames.  The VWAP ratio is then presented on a chart as a line.

It has been likened to a moving average, in that when the price is above the VWAP line the market is seen as in an uptrend, and when the price is below the VWAP the market is in a downtrend.