VWAP stands for Volume Weighted Average Price. Most people would pronounce it “vee-whap”. This term is commonly used in trading financial markets. When you want to buy stocks or forex from an exchange or broker, you can only buy what’s available at that time. Each broker or exchange has an order book. The order book contains the available liquidity for the instrument you want to buy. Not all of what is available inside the order book is the same price because not all buyers and sellers want to sell or buy at the same price. Also, some bigger orders may get partially filled, leaving the remaining volume of the order inside of the order book. This means there are different volumes of the asset available at different prices.
When you make a deal to buy an asset, your broker will try to give you the best price available. However, not all of your order can be filled at the best price in the case that your order is larger than what is available at that best price. This means the remainder of your order will be filled using the worst prices. The idea of VWAP is a simple equation to get the average price of your whole purchase.
Let’s say you want to BUY 1 million EUR/USD and your order is filled with the following prices:
- 50k @ 1.14401
- 500k @ 1.14405
- 450k @ 1.14406
The Volume Weighted Average Price of 1 million EUR/USD is 1.14405. As you can see, the entire order is not filled at 1.14401 because there is not enough volume in the order book.