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Day Trading Software VWAP Calculation Differences – Iterative VWAP Versus Cumulative VWAP

The weighted average price (VWAP) of a stock, in basic terms, is the “average” price of the stock in relation to the amount of money it has earned during the day. With more emphasis on tracking VWAP than the algorithm that affects day trading activities, you may be surprised to learn that many day trading software companies do not use Standard VWAP calculator! Although both calculators will produce the same results, you may want to contact your trading software company today to ask which VWAP calculator they use if your trading method tracks VWAP. your day The agent on the other end of the line may not know what calculator to use, so be prepared to wait a few hours (or even days!) for a response.

The “cumulative” VWAP is considered the “most accurate” calculation because it changes with each transaction. The formula is:

The sum of all transactions’ (Volume in shares x Trading Price) divided by Cumulative Volume. For example, let’s say a stock has 5 trades for the day so far:

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

The VWAP is:

($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 is the “combined VWAP”

“Iterative” VWAP calculations are sometimes used by software companies because they are easier to keep in the database and prevent general software from running slower than optimal speed. It uses the last VWAP value as the basis for calculating the VWAP of the next trade. Using the same example as above:

• First refund: (20.05 x 1000) / 1000 = 20050 / 1000 = $20.05
• Second refund: $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, as the number of trades (iterations) increases, the two VWAP calculations will be closer. With each brand having hundreds (or thousands) of transactions per day, this shouldn’t be a big problem for most day traders. If you are tracking the VWAP for a VERY thinly-traded brand – with trades occurring several times a day – consider asking the day trading software company what method they use to calculate the VWAP. This is so that you know how to monitor the trading activity and you can make the necessary adjustments in the way you execute the trade.

You may also wish to speak with your day trading software company about other VWAP nuances such as whether to count pre-market trades in the VWAP calculation. Find out if you have the ability to plot VWAP on intraday charts with indicators such as moving averages. These nuances will give you the best chance of optimizing your day trading software to help you trade with VWAP.

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