VWAP Volume Weighting Does Not Encode Trade Direction

Summary

The document defines volume-weighted average price as the sum of traded price times volume divided by total volume. It asks whether the volume input should be signed according to buy or sell direction, or whether both sides contribute positive volume. The included answer says that the cited early academic definition does not account for trade side, so ordinary VWAP aggregates transaction volume without distinguishing buyer-initiated from seller-initiated trades.

The answer also allows that a separate measure could incorporate direction, while observing that it would no longer be the same measure as VWAP. No alternative formula, execution study, or comparison of signed and unsigned measures is presented. The takeaway is limited to the definition: standard VWAP is a volume-weighted price benchmark, not an indicator of net buying or selling pressure. A trader seeking directionality would need a distinct measure, but this document does not specify one.

Key ideas

• VWAP is calculated from traded prices weighted by traded volume.
• The cited definition uses volume without encoding whether a trade was a buy or a sell.
• A directional volume measure can be defined separately, but it is distinct from standard VWAP.
• VWAP alone does not report net buying or selling pressure.

Tags

# Does VWAP distinguish between buy and sell trading volume?


# Does VWAP distinguish between buy and sell trading volume?












VWAP is a ratio of the cumulative value (price ($p$) times volume ($q$)) traded in a stock, divided by total traded volume during the day:

$$\frac{\sum{q \times p}}{\sum{q}}$$

Does the volume component ($q$) that appears in the numerator and denominator distinguish between buy and sell trades somehow? (negative $q$ for sell, and positive $q$ for buy.) Or does it treat both long and short as positive values?

## Answer by Bob Jansen (score 2)

https://quant.stackexchange.com/a/55096

The first reference I can find on Google Scholar is "The Total Cost of Transactions on NYSE" by Stephan A. Berkowitz, Dennis E. Logue and Eugene A. Noser, Jr. in the Journal of Finance. Their definition on page 4 (100 in the journal) doesn't consider the side of the trade.

Of course, this doesn't prevent anyone from defining a different measure that does include this information but it would not quite be VWAP.

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.