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What does the Volume Weighted Average Price (VWAP) mean and how is it analysed?

To calculate a volume weighted average price for a period, take all of the transactions during the period and multiply each number of shares by the price to get the value of the transaction. Then total the values of all the transactions and total the number of shares for the period. Then divide the total value by the total number of shares, to get an average that will be weighted according to the number of shares transacted at each price.

Analysing the data is fairly well common sense. The volume weighted average price tells you where the greater part of the day's volume went through. For example, if a day had a range of $4.50 to $4.70 and the volume weighted average price was $4.51, you could assume that most of the volume was done near the low. If the day closed near the low, you could be fairly sure that sellers had control of the market at the close. Whereas, if the close was near the high, then something may have changed late in the day to take the price away from where the business had mostly been done, because buyers were in control at the close. Remember that with small stocks, the occasional large trade can distort the average.

Volume weighted average prices might also be more relevant for some indicators than the closing price. However, I have never done any work on this.