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Technical Indicators

VWAP definition

What is VWAP?

Volume Weighted Average PriceVWAP, is a technical indicator calculated by taking the number of shares bought times the share price and dividing by total shares.

VWAP is the abbreviation for volume-weighted average price, which is a technical analysis tool that shows the ratio of an asset’s price to its total trade volume. it provides traders and investors with a measure of the average price at which a stock is traded over a given period of time.

To calculate VWAP, you use the following equation:

VWAP = ∑(amount of asset bought x asset price)/total shares bought that day

The standard VWAP is calculated using all of the orders of a given trading day, but it can also be used to look at multiple time frames.

The VWAP ratio is presented on a chart as a line. It has been likened to a moving average, in that when the price is above the VWAP line the market is seen as in an uptrend, and when the price is below the VWAP the market is in a downtrend. 

VWAP ratios are used in algorithmic trading to help traders and investors to determine the best price at which to buy or sell, in line with the volume of the market. By ensuring high liquidity, traders can usually expect lower transaction costs and best execution. 

Since the VWAP calculation is based on historical data it is still considered a lagging indicator, but that doesn’t stop traders from using this measure to establish support and resistance levels suitable for intraday trading. In addition to this, because institutional traders use the VWAP as a benchmark for execution activity, the VWAP price level is considered to be highly influential in intraday price action.

KEY TAKEAWAYS:

  • Volume-weighted average price (VWAP) is a ratio of the cumulative share price to the cumulative volume traded over a given time period.
  • The measure often serves as a benchmark for comparing trade executions.
  • The VWAP uses intraday data.
  • The VWAP is a major level of importance that a lot of professional traders and institutions monitor.
  • Some traders use the VWAP to indicate the timing of buy and sell signals for intraday trading.
 

Relative Volume Definition:

What is RVOL? 

Relative Volume (often times called RVOL) is a technical indicator that tells traders how current trading volume is compared to past trading volume over a given period. 

The Relative Volume (RVOL) indicator compares volume data for each price bar with the average volume over a specified number of prior bars. The RVOL ratio produced allows technical traders to easily spot setups where unusually high or low volume is powering a price move. When the indicator value is greater than one, the volume is higher than average; conversely, a value less than one means lower than average volume.

A high relative volume (RVOL) is correlated with volatility, which in turn impacts your returns, i.e. profits.

A stock’s volume has 2 aspects – volume and relative volume. They are not the same thing. If you are able to measure the relative volume ratio, you are able to know if the trading activity for a stock is increasing or decreasing. 

Relative Volume is a trading indicator primarily used by day traders that compares the current trading volume relative to the usual trading volume in the past.

The metric volume reflects the number of shares traded of a specific stock. All charting platforms have that information about the currently traded volume available, and typically the trading volume is visualized below the chart with pricing action.

Popular relative volume indications are: 

  • Current day volume vs. previous day volume
  • Current day volume vs. 5-day average trading volume
  • Current day volume vs. 10-day average trading volume

How is RVOL calculated? 

The RVOL indicator is calculated in a relatively simple way. You just divide the current volume of an asset with the average volume in a certain period.

Relative volume is defined by a ratio. The equation to derive the relative volume ratio is very simple.

Today’s Volume/ Average Volume

 

Example: Measuring against the 50 day average

Today’s volume for XXXX is 10 million.
50 day average daily volume is 1 million.

The relative volume ratio is 10 million/1 million = 10x.

This means that for today, XXXX has traded 10 times its 50 day average daily volume.

A 6 month average of 1 million means that the stock has traded an average of 1 million shares per day, over the last 6 months.

A 5 day average of 4 million means that the stock has traded an average of 4 million shares per day, over the last 5 days.

KEY TAKEAWAYS:

Relative volume is a ratio that calculates current volume to average volume.

Relative volume tell us if volume flows are increasing or decreasing.

Increased volume flows often accompany higher volatility i.e. significant price action.

A high relative volume tells us that there is increased trading activity in a stock.

In most periods, using RVOL by itself tends to be meaningless. Therefore, we use numerous different trading strategies to know whether to buy or sell. 

How long have you been waiting to profit from stock investing?

Investments should generate profit. Buying when the stock is cheap and selling when it’s more expensive is the optimal path. Often the timing of the trade is what creates problems. Investors don’t buy at a low price. Then they make the problem worse by missing the high point to sell. The missed potential for profit will amount to fortunes being lost over time. 

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Disclaimer: This content is only intended for informational purposes. Before making any investment, you should always do your own research and analysis.

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