The VWAP is a Financial Market metric that stands for “volume-weighted average price.” It is given by (sumshares brought(shares bought at price*price its at)/(total shares bought in period)).
“the price we care the most about, is the price where the most volume is traded.”
Motivation
Its a weighted-by volume trading price. Though the closing price is the price used for accounting, it isn’t a good metric for large-volume trades.
Trading at the VWAP
We Trade at the VWAP because a LARGE trade will move the market around, and we don’t want that if we are a large trader. So we trade at the VWAP to ensure that we are getting the best possible value.
- Build a volume a profile
- Slicing the orders to match
- Control for volume deviations
Volume Profile
We use the volume-profile: “how much/what percentage of today’s volume happened in this chunk of the day” to predict today’s trading by matching by historical data. This often results in looking like a J curve: lots of trading happen at the beginning of the day, very little towards the middle, and LOTS in the end.
Slicing Orders
Slice your funds needed to trade, volume-wise, according to the Volume Profile. Set limit orders per slice at the best price for the market.
Control Deviations from Expectation
If you were’t able to trade by the limit order you posted at that slice, by the end of the slice, cancel your limit order and just send in a market order to ensure your participation with the desired volume at that slice.