For the Uninitiated Not for Accomplished traders:
Let us go... VWAP is a price level where most of the transactions (no. of contracts/shares) took place in that period(day/month/week). But we will restrict ourselves to day trading. It is a refrence point not an indicator. Clear!!!
If it is not an indicator what do we use it for?
We use it for finding Context and to find trade locations.
How do we use VWAP to find context? Suppose we have a price chart in front of us how do we find where is value? At the most we can find high,low and current close on price chart not value. So when we plot VWAP we have a reference point where most of the trades so far has happened. We call it value.
Now when we plot VWAP we can immediately see where the value is with respect to current close. Whether current close is far away from value? If it is, we would not like to take a trade away from value. We would like the price to come near value to decide what to do. We can also see if price is above value or below value. We can also see if value line is flat trending higher or lower. Now suppose price is at value. what will price do if it is at value point? If it stays there we cannot benefit or there will be no reward. So price has to move away from value or VWAP. We call this volatility. More volatile the price more risk or reward we will get depending upon whether our trade direction is right or wrong. So how do we measure this volatility? We use statistics to measure volatility. We plot standard deviation bands around this value. So the minimum expectation for the price to move away from value is ist SD band(+ve or –ve). So this is the minimum risk or reward. Suppose VWAP is at 100 and ist SD is at 110 then our minimum reward is 10 ticks. Similarly we plot 2nd and 3rd SD bands to take advantage of volatility.
Now we have two arsenals with us value in the form of VWAP and volatility in the form of Standard Deviation bands and we want to take advantage of this .
How can we accomplish that? How do we know what is going to happen next? Like a scientist we have to form a Thesis. These SD bands help us forming and updating our thesis. Statistics teach us that most events happen 2SD bands away from value. So price may shoot to 2SD band, reverse from there or breakout from there. So now we will have a decision point to make whether it is a trend day or a breakout day or reversal day or range day?
TRENDDAY : When we observe that price is hitting 2SD with force and pulling to ist SD band or making just one retrace to VWAP(late morning) or none and then price start trending strongly in one direction it is the most compelling characteristic of a trend day formation. Watch the angle of VWAP.It will rise with +1SD and fall with -1SD.
RANGE DAY: Price will hit +2SD and -2SD regularily with to and fro moves with a flat VWAP.
BREAKOUT DAY: Day will beging with range day hitting 2SD BANDS and later breakout from range and start trending.
REVERSAL DAY: Price trends away from VWAP in the beginning of the day and then reverse below or above VWAP in the opposite direction with very few retracements.
How to trade VWAP? You will have to devise strategies around the VWAP and day types as soon as you spot those. It is a personal choice. But if you are so adamant and insisting me to divulge my secrets then let me give you some clues.(No one is perfect. Atleast not me!) Trade at your own risk!
For range days : Fade -2SD +2SD extremes.
For Trend days: buy sell ist SD to add to positions and if already in position trail SL below ist SD.
For revesal days: Exit and fade at vwap or opposite 1SD(most difficult day to trade for me)
For breakout day: Get on board when breakout happens above below 2SD. If you have an opposite position your stop above below 2SD.
VWAP: Generally to get on the bus on retrace or in reversal situation to initiate a reversal trade on cross of VWAP.
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Let us go... VWAP is a price level where most of the transactions (no. of contracts/shares) took place in that period(day/month/week). But we will restrict ourselves to day trading. It is a refrence point not an indicator. Clear!!!
If it is not an indicator what do we use it for?
We use it for finding Context and to find trade locations.
How do we use VWAP to find context? Suppose we have a price chart in front of us how do we find where is value? At the most we can find high,low and current close on price chart not value. So when we plot VWAP we have a reference point where most of the trades so far has happened. We call it value.
Now when we plot VWAP we can immediately see where the value is with respect to current close. Whether current close is far away from value? If it is, we would not like to take a trade away from value. We would like the price to come near value to decide what to do. We can also see if price is above value or below value. We can also see if value line is flat trending higher or lower. Now suppose price is at value. what will price do if it is at value point? If it stays there we cannot benefit or there will be no reward. So price has to move away from value or VWAP. We call this volatility. More volatile the price more risk or reward we will get depending upon whether our trade direction is right or wrong. So how do we measure this volatility? We use statistics to measure volatility. We plot standard deviation bands around this value. So the minimum expectation for the price to move away from value is ist SD band(+ve or –ve). So this is the minimum risk or reward. Suppose VWAP is at 100 and ist SD is at 110 then our minimum reward is 10 ticks. Similarly we plot 2nd and 3rd SD bands to take advantage of volatility.
Now we have two arsenals with us value in the form of VWAP and volatility in the form of Standard Deviation bands and we want to take advantage of this .
How can we accomplish that? How do we know what is going to happen next? Like a scientist we have to form a Thesis. These SD bands help us forming and updating our thesis. Statistics teach us that most events happen 2SD bands away from value. So price may shoot to 2SD band, reverse from there or breakout from there. So now we will have a decision point to make whether it is a trend day or a breakout day or reversal day or range day?
TRENDDAY : When we observe that price is hitting 2SD with force and pulling to ist SD band or making just one retrace to VWAP(late morning) or none and then price start trending strongly in one direction it is the most compelling characteristic of a trend day formation. Watch the angle of VWAP.It will rise with +1SD and fall with -1SD.
RANGE DAY: Price will hit +2SD and -2SD regularily with to and fro moves with a flat VWAP.
BREAKOUT DAY: Day will beging with range day hitting 2SD BANDS and later breakout from range and start trending.
REVERSAL DAY: Price trends away from VWAP in the beginning of the day and then reverse below or above VWAP in the opposite direction with very few retracements.
How to trade VWAP? You will have to devise strategies around the VWAP and day types as soon as you spot those. It is a personal choice. But if you are so adamant and insisting me to divulge my secrets then let me give you some clues.(No one is perfect. Atleast not me!) Trade at your own risk!
For range days : Fade -2SD +2SD extremes.
For Trend days: buy sell ist SD to add to positions and if already in position trail SL below ist SD.
For revesal days: Exit and fade at vwap or opposite 1SD(most difficult day to trade for me)
For breakout day: Get on board when breakout happens above below 2SD. If you have an opposite position your stop above below 2SD.
VWAP: Generally to get on the bus on retrace or in reversal situation to initiate a reversal trade on cross of VWAP.
