VWAP stands for the Volume Weighted Average Price. An intuitive way of thinking about this indicator is to think of it as a type of an average price. However, unlike average, VWAP uses weights to give some prices more priority over others when using them to calculate the average. Naturally, a follow-up question to this is, what prices are given more priority?
In this blog post, we’ll show you how to backtest an option buying strategy using the VWAP indicator, available exclusively on AlgoTest.
A few days ago we shared a strategy on Twitter that used the #VWAP template to trade.
Answer – those prices at which the highest volume is traded are given the highest priority. If 10 lots of BANKNIFTY trade at ₹100 and 1000 lots trade at ₹110, then the simple average will just be (100+110)/2, which is ₹105. The VWAP, on the other hand, will be (100*10 + 110*1000)/(10 + 1000), which is ₹109.90. Notice how the VWAP is much closer to ₹110 as compared to the average price!
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