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VWAP algorithm

An algorithm that trades in proportion to expected volume through the day, targeting the volume-weighted average price as its benchmark.

A VWAP algo forecasts the stock's intraday volume profile, typically from weeks of history, then trades its share of each interval. Because vwap is the most widely quoted execution benchmark, "I got VWAP" is the standard defence of a fill.

It is a benchmark-tracking tool, not an alpha tool. If you have information and the price is about to move, matching VWAP means losing slowly on the whole order.

Example: the profile says 14% of volume trades before 10:30. A 200,000-share VWAP order therefore aims to do about 28,000 shares in that window. Finish the day at 50.09 against a session VWAP of 50.11 and you have beaten the benchmark by two cents, worth $4,000.

Related: twap-algo, participation-rate, algorithmic-order, benchmark-close

See it drawn

Original diagrams for the ideas on this page. Illustrative, not real market data.

Intraday price swinging around VWAPA price line for one trading day weaving above and below a smoother VWAP line, with a band drawn one standard deviation either side of it.INTRADAY PRICE AND VWAPprice9:3012:4516:00+1 SD bandVWAP−1 SD bandIllustrative session. VWAP starts fresh at the open and firms up as the day fills in.
VWAP and its standard-deviation bands. VWAP is the day's average price weighted by how much volume traded at each price, so it shows where the bulk of the day's business was done. The bands sit one standard deviation either side, and price here swings between them all session.

Educational only, not advice. Spotted an error? Post in Site Feedback.