What is the primary purpose of VWAP in trading?

The primary purpose of VWAP, or Volume Weighted Average Price, is indeed to serve as a price benchmark for trading with greater precision. VWAP calculates the average price at which a stock has traded throughout the day, weighted by volume. This means that it takes into account both the price of trades and the volume of shares traded at each price, providing a more accurate reflection of the stock's performance throughout the trading session.

Traders and investors typically use VWAP to gauge the price at which they can buy or sell a security relative to its average price during the day. When a trade is executed at or below the VWAP, it is often considered a good trade for buyers since it indicates that they are purchasing cheaper than the average price. Conversely, sellers who execute trades at or above the VWAP may view this as selling at a favorable price.

This utility makes VWAP a critical tool for institutional traders, allowing them to place larger orders without disrupting the market and minimizing market impact. It is a widely followed benchmark that helps in assessing the efficiency of trading strategies.