VWAP and Deviation Bands
Volume-weighted average price, or VWAP, is the sum of price times volume divided by total volume over a specified window. It is a historical benchmark; deviation bands depend on an additional dispersion convention.
How it works
For trade-level VWAP, use each eligible trade’s price and size. Bar-based versions often approximate with typical price and bar volume. Session VWAP resets at a defined start, while anchored VWAP begins at a chosen event. Specify whether bands use weighted price variance or another calculation.
Worked example
If 100 shares trade at 10 and 300 at 12, VWAP=(100×10+300×12)/400=11.50. The simple mean of the two prices is 11, which gives a different answer because it ignores volume. A buy at 11.40 is below this historical VWAP, but that alone does not establish a favorable future return.
Amounts, prices and scenarios are fictional teaching examples. They exclude any effects not explicitly stated and are not trade recommendations.
Limits and common mistakes
Excluding auctions or using partial venue feeds changes the benchmark. Choosing an anchor after seeing the result creates selection bias. Trading below VWAP is not proof that an asset is undervalued.
Knowledge check
Why is VWAP not simply the midpoint of a session’s high and low?
Read the explanation
It weights actual eligible activity by size. Extremes contain no information about how much volume traded at each price.
References and further reading
These sources explain the underlying concepts and specifications. They do not endorse QBMFX Academy. Check the relevant market, protocol version and reporting rules before applying an example.