Technical analysis of stock charts has come a long, long way since the days of W.D.Gann and the other historic chartists. What use to take days of painstaking work can now be completed in a matter of seconds using a just average personal computer.
This means that today vast data sets can be analysed in real time to make profitable stock predictions. However, in the wrong hands, technical analysis can be nothing but landmines of confusion and misinformation.
If you are new to the investing game, it’s important that you begin a study of technical analysis from the ground up. This means learning the patterns, definitions, and how they are applied. It isn’t difficult, it just takes some time.
One of the more advanced but growing in popularity concepts of technical analysis is called VWAP or value weighted average price. Hedge funds use this calculation to set buy prices.
WHAT IS VWAP?
Volume-Weighted Average Price (VWAP) is exactly what it sounds like: the average price weighted by volume. VWAP equals the dollar value of all trading periods divided by the total trading volume for the current day. Calculation begins when trading commences and finsihes when trading closes. It works for the current trading session since intraday periods and data are used in the calculation.
Traditional VWAP is based on tick data. Obviously, there are many ticks (trades) during each minute of the day. Active securities during active time periods can have 20-30 ticks in one minute alone. With 390 minutes in a typical stock exchange trading day, many stocks end up with well over 5000 ticks per day. There are over 5000 stocks traded every day and these ticks start adding up exponentially. Needless to say, tick-data is very resource intensive.
There are five steps involved in the VWAP calculation.
- Determine the average of the high, low and close {(H+L+C)/3)}.
- Multiply the typical price by the period’s volume.
- Create a running total of these values. This is also known as a cumulative total.
- Create a running total of volume (cumulative volume).
- Divide the running total of price-volume by the running total of volume.
