Overview
The volume weighted moving average calculates a moving average but weights each price by the volume traded at that price. The calculation is given as
{% VWAP = \frac{\sum_i Price_i \times Volume_i}{\sum_i Volume_i} %}
Use in Technical Analysis
The volume weighted average is intended to show the price at which the average trade was executed. It is known to be used by many large trading houses to evaluate their trade execution performance. (That is, each trade is evaluated by comparing it to the relevant VWAP to see if the trader received the average price that ocurred for that type of trade).
It is thought that if the price is above the VWAP, it is thought that purchasers should delay buying until it falls back to the VWAP. If the price is below the VWAP, sellers should wait until the price moves back to the VWAP. Because large trading houses use VWAP as a performance measure, their traders are incentivized to trade in this manner, and day traders can trade in similar manner, in order to front run the large traders.