Stocks are among the most volatile of all financial assets. Whenever major news about the economy or a specific corporation is revealed, a stock's price may move by several percentage points within a day. In such cases, it's hard to decide whether the reference price point for the day is the opening or closing price or another metric. Average traded price provides a fresh alternative to those typical reference points and may prove a superior tool for the technical analyst.
Average Traded Price
Average traded price, also referred to as volume-weighted average price, is what buyers have paid for one share on average, over the course of a specific time period. It is most frequently calculated for a single day but is equally useful for weekly, monthly or yearly periods. To work out the weighted average, divide the dollar amount of all trades that took place during the period by the number of shares that changed hands. The dollar amount of all trades is often reported by brokerage houses or finance portals such as Yahoo or Google Finance.
Say a stock opened the day at $10, and a total of 1,000 shares changed hands at that price. Later during the day, the price rose to $10.40, and 5,000 shares changed hands, while the last set of trades were at $10.10 for an additional 1,000 shares. Total dollar volume equals $10_1,000+ $10.4_ 5,000+ $10.1*1,000 = $72,100. Total Volume is 1,000+5,000+1,000= 7,000 The Average Traded Price equals $72,100 / 7,000 = $10.30, and that's the average cost of the shares to buyers who bought them during this trading day.
ATP's significance is that it approximates what most buyers paid for the stock. Neither the opening nor the closing price provides this information. The ATP is crucial especially if the stock has a tendency to swing wildly during the day and subsequently settles close to the opening price. When important news is announced, stock prices tend to react wildly but then settle somewhat with a move in the opposite direction as the market digests this new information. Most long-term stock charts will use either just the day's closing price or the opening and closing price, neither of which provides where the majority of trading took place.
Use in Technical Analysis
ATP is widely used in technical analysis because it influences resistance levels. Investors try to avoid even minor trading losses. So if investors paid around $10.30 a share and the stock is trading at around $10-$10.10, an advance to right around or slightly above $10.30 may bring in a wave of sales. That's because several investors might wish to unload their unprofitable holding and wait for the price to climb back to where they bought to avoid loss selling. If that occurs, the stock's price may touch $10.30 and come back down as a result of sales pressure.