By: Montana Timpson
Trading benchmarks for professional traders can range from performance of broad indices like the S&P 500 or the Dow, to individual calculations of average prices of securities over specific periods of time. Understanding mathematical benchmarks and data points like VWAP and Simple Moving Average is advantageous in many ways, providing professional traders with insight into both the trend and value of any given security. Both VWAP and Simple Moving Average are broken down, in full, as we explore the basics of trading benchmarks, below.
A benchmark, to preface, is a standard against which the performance of a security, mutual fund or investment manager can be measured. One of the most common benchmarks is volume weighted average price (VWAP). VWAP is a trading guideline used by traders that gives the average price a security has traded at throughout the day, based on both volume and price — volume, of course, referring to the amount of an asset or security that changes hands over some period of time, often over the course of a day.
When calculating VWAP, price is determined by adding up the dollars traded for every transaction — the price multiplied by the number of shares traded — and then dividing by the total shares traded.
Simple Moving Average
While VWAP calculates the sum of price multiplied by volume, divided by total volume, Simple Moving Average is a type of moving average that is calculated by summing up closing prices over a certain period, and then dividing it by how many periods there are.
In calculating Simple Moving Average, volume is not a factor — this is because the VWAP weighs each day’s price change by the amount of volume occurring in that day, whereas the Simple Moving Average implicitly assumes that all trading days have the same level of volume, though both are shorter term calculations than many.
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For more details on VWAP and Simple Moving Average, check out Lightspeed’s Trading Education Center, for our comprehensive trading glossary for professional traders. For additional references, guides and resources, view our active trading blog and register now for our next live webinar.
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