Financial

Day Trading Software VWAP Calculation Differences – Iterative VWAP vs. Cumulative VWAP

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The Volume Weighted Average Price (VWAP) of a stock is basically the “average” price of the stock relative to the volume it traded during the day. As the monitoring of the VWAP is stepped up due to algorithms that affect intraday trading activity, you may be surprised that many day trading software companies do not use a standardized calculation of the VWAP! Although both calculations produce similar results, you can contact your day trading software company to ask which VWAP calculation is used if your day trading style warrants monitoring the VWAP. There is a chance that the agent on the other end of the line may not know which calculation is being used. So wait a couple of hours (or even days!) Before you get a response.

The “cumulative” VWAP is considered to be the “most accurate” calculation as it changes with every transaction. The formula is:

The sum of all transactions (volume in shares x traded price) divided by the cumulative volume. For example, let’s say the stock has 5 trades on that day:

  • $ 20.05 1000 shares
  • $ 20.06 800 shares
  • $ 20.04 100 shares
  • $ 20.03 2000 shares
  • $ 20.03 3000 shares

The VWAP would be:

($ 20.05 x 1000) + ($ 20.06 x 800) + ($ 20.04 x 100) + ($ 20.03 x 2000) + ($ 20.03 x 3000) / (1000 + 800 + 100 + 2000 + 3000)

This means:

(20050 + 16048 + 2004 + 40060 + 60090) / (6900) = 20.0365. Therefore, $ 20.0365 would be the “cumulative VWAP”

The “iterative” VWAP calculation is sometimes used by software companies because it is easier to maintain in the database and prevents the overall software from running slower than the optimal speed. It uses the last value of the VWAP as the basis for calculating the VWAP on the next trade. Use the same example as above:

  • 1st iteration: (20.05 x 1000) / 1000 = 20050/1000 = $ 20.05
  • 2nd iteration: $ 20.05 + (20.06-25.05) x 800) / (1000 + 800) = 20.0544
  • 3rd iteration: 20.0544 + (20.04-20.0544) x 100 / (1800 + 100) = 20.0536
  • 4th iteration: 20.0536 + {(20.03-20.0536) x 2000) / (1900 + 2000) = 20.0311
  • 5th iteration: 20.0311 + {(20.03-20.0311) x 3000) / (3900 + 3000) = 20.0306

Of course, the more trades (iterations) are carried out, the closer the two VWAP calculations are. Since each symbol has several hundred (or several thousand) transactions every day, this shouldn’t be a big problem for most day traders. If you are monitoring the VWAP for VERY thinly traded symbols – with trades that happen only a few times a day – you should ask your day trading software company what method the VWAP is calculated by. This is just to let you know how to monitor trading activity and then make any necessary adjustments to your trade execution methods.

You can also talk to your day trading software company about other VWAP nuances, such as: B. if you include pre-market trades in the VWAP calculation. Find out if you can plot the VWAP on intraday charts alongside indicators like moving averages. These nuances will give you the best chance of maximizing your day trading software to aid you in your VWAP-related trading.

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Source by Matthew Mc Dermott