Another fundamental concept in the trading world is the volume weighted average price or VWAP. In its simplest form, the VWAP gives the average price a security has traded at throughout the day based on both volume and price.

It's a benchmark many traders use to gauge whether they're getting a good execution price or not. And here's how it's calculated. The total dollar amount traded in the security over a specific period, like for example a trading day, is divided by the total volume traded in that same time interval. This means that prices at which large volumes have been traded have a higher impact than those prices at which only smaller volumes have changed hands.

Let's have a look at a concrete example to reduce complexity. We are not looking at a whole trading day, but just a two hour window, which we have split into 15 minute intervals. Let's calculate the VWAP for the two hour period. In the first step, we have to multiply each price that traded with the applicable volume. The simple sum of these products will give us the total dollar amount traded.

The second step is to divide the total dollar amount by the volume traded, and this gives us a VWAP of 81.7516. This is slightly below the TWAP or simply the average price traded over that period. This is due to the fact that at the beginning of the period, the asset traded at lower prices, but at higher volumes. When prices went up later in the period, the traded volume decreased. So in this example, the lower prices have a slightly higher weighting when calculating the VWAP. As we can see, the VWAP considers both price and volume capturing a more comprehensive view of market activity throughout the day. This means that if a security has traded heavily at a particular price, that price gets more weight in the VWAP calculation. As a result, the VWAP gives a realistic average price at which the shares have traded over the day. When traders compare their executed prices to the VWAP, they can assess how well they've performed relative to the majority of trading activity. In contrast, the TWAP only considers the passage of time and ignores volume. This means it might give equal importance to periods of low trading activity as to periods of high activity. So while TWAP provides a consistent time-based benchmark, it doesn't take into account the depth or intensity of trading, making the vwp a more representative measure of true market conditions, and that's a better consistent benchmark for assessing trading performance.