What Are Vwap And Adx, And How Are They Calculated?

By Author: Maithili Pawar
Total Articles: 33
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Two important terms are used in the stock market. They are Volume Weighted Average Price or VWAP and ADX indicator. Let us get to know them better, one by one.

Volume Weighted Adjusted Price - VWAP

The Volume Weighted Average Price or VWAP is the average price of a stock, weighted by the total trading volume. It is an important indicator that the people use, to understand the average cost of a stock over some time.

It is vital to know about the volume-weighted average price so that they can compare the current price of the stock to a benchmark. It assists the investors to make careful decisions and help them decide when to enter and exit the stock market. The VWAP also helps the investors to understand their approach to a stock – whether a stock is active or passive. It allows them to make the right trade in the stock market at the right time.

How to Calculate Volume Weighted Average Price

The volume-weighted average price can be calculated for each day. You can begin as the markets start until markets get closed for the day. VWAP is calculated every day, and hence, it uses intraday data.

The formula for calculating VWAP is:

volume-weighted average price = (Typical price + volume)/ cumulative volume

It is a simple calculation. Here, the typical price for the stock gets calculated, which is the average of the high price, the low price, and the close price of the stock for that day. For doing this, you can use the formula:

[(H+L+C)/3]

In the next step, you will have to multiply the typical price by the volume.

The volume-weighted average price can be calculated for any period to show specific data in the stock chart. VWAP is automatically calculated on the trading software. You need to enter the desired number of periods.

Average Directional Movement Index - ADX

ADX or the Average Directional Movement Index is also a tool used by the investors and traders. It is used to measure the overall strength of a trend. ADX is an important indicator that averages the expanding price range values.

The ADX indicator is a part of the Directional Movement System, which was conceived by Welles Wilder. It measures the strength of price movement in a positive and negative direction. It uses DMI+ and DMI- indicators as well along with the ADX.

In simple words, the average directional index is used to find when the price is trending strongly. It is adjudged as the ultimate trend indicator.

Calculating ADX

ADX calculations depend on the movement of the average price range expansion, over a time. ADX is used on the trading of stocks, mutual funds, exchange-traded funds, and futures.

ADX can be plotted as a single line and can range from the value zero to 100. It registers trend strength whether the price is trending up or down. AdX is plotted in the window where there are other two directional movement indicator lines - +DMI and -DMI.