Daily trading software VWAP calculates differences - iterative VWAP and cumulative VWAP

The volume-weighted average price [VWAP] of a stock, basically, is the "average" price of a stock relative to the volume of the day. Since the algorithm affects intraday trading activities, so much more emphasis on monitoring VWAP, you may be surprised to find that many day trading software companies do not use VWAP's standardized calculations! Although both calculations produce similar results, if your day trading method requires monitoring of VWAP, you may wish to contact your day trading software company to ask them which VWAP calculation to use. It's possible that the representative at the other end of the line may not know which calculation to use, so be prepared to wait a few hours [or even a few days!] to get the answer.

The "cumulative" VWAP is considered the "most accurate" calculation because it varies with each transaction. The formula is:

The sum of all transactions ' [stock trading volume × transaction price] divided by the cumulative trading volume. For example, let's say that there are 5 trades in stock so far:

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

VWAP will be:

[$20.03 x 3000]+[$20.03 x 1000]+[$20.06 x 800]

This translates to:

[20050 + 16048 + 2004 + 40060 + 60090] / [6900] = 20.0365. So $20.0365 will become "cumulative VWAP"

"Iterative" VWAP calculations are sometimes used by software companies because they are easier to maintain in the database and make the entire software run slower than optimal. It uses the last value of VWAP as the basis for calculating the VWAP for the next transaction. Use the same example as above:

• First iteration: [20.05 x 1000] / 1000 = 20050/1000 = $ 20.05
• Second iteration: $20.05 + [20.06 - 25.05]x 800] /[1000 + 800]= 20.0544
• The third iteration: 20.0544 + [20.04 - 20.0544] x 100 / [1800 + 100] = 20.0536
• The fourth iteration: 20.0536 + [20.03 - 20.0536] x 2000] / [1900 + 2000] = 20.0311
• The 5th iteration: 20.0311 + [20.03 - 20.0311] x 3000] / [3900 + 3000] = 20.0306

Of course, as more transactions [iterations] progress, the closer the two VWAP calculations will be. Since each symbol has hundreds [or thousands] of transactions per day, this should not be a big problem for most traders. If you happen to monitor VWAP's very thin trading symbols - transactions only happen a few times a day - please consider asking your daily trading software company which method they use to calculate VWAP. This is just to let you know how to monitor trading activity, and then you can make the necessary adjustments to the trade execution method.

You can also discuss other VWAP nuances with your day trading software company, such as whether they calculate pre-market transactions in VWAP calculations. Find out if you have the ability to plot VWAP and mobile rates on your intraday charts. These nuances will give you the best chance to maximize day trading software to help you with VWAP related transactions.

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