# Volume Weighted Average Price (VWAP)

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## Definition of 'Volume Weighted Average Price (VWAP)'

If a future (or other security, commodity or stock) trades to a high price of 1010 and a low price of 1000 during the day and also trades at all other prices in between during the day then the average price that the future traded at would be 1005. This is a simple average. It adds up all the prices that were traded at during the day and divides by the number of price points that were observed.

Now imagine that there were two trades during the day. The first was for 20,000 contracts at a price of 1010. The second was for 1 contract at a price of 1000. Would the average of 1005 fairly reflect the price at which the future traded at on that day? Probably not because 99.9% of the trades took place at 1010. The Volume Weighted Average Price (VWAP) takes this into account and will calculate the VWAP price to be 1010 instead of the average price of 1005.

Now imagine that there were two trades during the day. The first was for 20,000 contracts at a price of 1010. The second was for 1 contract at a price of 1000. Would the average of 1005 fairly reflect the price at which the future traded at on that day? Probably not because 99.9% of the trades took place at 1010. The Volume Weighted Average Price (VWAP) takes this into account and will calculate the VWAP price to be 1010 instead of the average price of 1005.

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