How is the Volume Weighted Average Price (VWAP) calculated?

The Volume Weighted Average Price (VWAP) is a key financial indicator used to assess the average price at which a security has traded throughout the day, weighted by the volume of shares traded at different prices. This makes it particularly useful for traders to gauge the market trend within a specific time frame.

The correct method for calculating VWAP involves taking the total dollar amount of trades (which is the price multiplied by the number of shares traded at that price) and dividing that value by the total number of shares traded over the same period. This method ensures that the average price reflects both the price levels and the volume of trading activity, leading to a more accurate representation of market consensus during the trading session.

This calculation is significant because it accounts for price fluctuations and provides a more reliable gauge of market value, especially in scenarios where trading volume may vary significantly. It helps traders make informed decisions regarding their trades relative to the overall market price movement.

The other methods described in the other choices do not adequately represent the concept of VWAP. They either disregard the volume aspect or do not incorporate a comprehensive view of the trading activity, making them unsuitable for calculating VWAP.