VWAP Benchmarks and Standard Deviation Bands
Summary
The document explains volume-weighted average price as the average traded price weighted by volume over a chosen period. It describes VWAP as an execution benchmark for investors seeking to trade in line with market volume. The text distinguishes guaranteed VWAP execution, where a broker promises the benchmark price, from best-effort target execution, where the realized price may vary more but commissions may be lower. It also notes that VWAP-based algorithms are a form of volume-participation execution.
An accompanying indicator formula calculates VWAP over a rolling 200-period window and plots bands one, two, and three standard deviations above and below it. This supplies a way to visualize dispersion around the calculated average, but the document does not specify how to trade those bands or evaluate their performance. Its explanation is general, and the excerpt does not clarify the intended data frequency or how the standard deviation calculation should be interpreted in practice.
Key ideas
- VWAP weights traded prices by volume across a selected time period.
- Execution algorithms can use VWAP as a target and participate in proportion to market volume.
- Guaranteed and best-effort VWAP execution differ in price certainty and commission trade-offs.
- The indicator example plots three standard deviation bands around a rolling VWAP estimate.
- No entry, exit, or validation rules are provided for using the bands as signals.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.