VWAP Trading Strategy

 

VWAP Trading Strategy in Detail

In this article, I am going to discuss the VWAP Trading Strategy in detail. Please read our previous article where we discussed Breakout Trading Strategy. As part of this article, we are going to discuss the following VWAP Trading Strategy concepts in detail.

1. What is the VWAP Trading Strategy?
2. Uses of VWAP
3. Limitation of VWAP
4. VWAP Strategies

What is the VWAP Trading Strategy?

VWAP stands for Volume Weighted Average Price. These tools are used mostly by short-term traders and in algorithm-based trading programs.

VWAP is often used to measure the trading performance of smart money. Professional traders who work for investment banks or hedge funds and need to trade large numbers of shares each day and cannot enter or exit the market by buying or selling a large position in stock during the day, institutional traders compare their price to VWAP values.

A buy order executed below the VWAP would be considered a good fill for them because the stock was bought at a below-average price (meaning that the trader has bought their large position at a relatively discounted price compared to the market). Opposite for sell

Therefore, VWAP is used by institutional traders to identify good entry and exit points. Conversely, when a professional trader has to get rid of a large position, they try to sell at the VWAP or higher

.VWAP has the big advantages of the timeframe you chose, VWAP is the same.

Use of VWAP Trading Strategy

• VWAP shows who is in control
• VWAP can determine the market trend at opening
• VWAP act as support and resistance

VWAP shows who is in control

VWAP is an indicator, it indicates who is in control of the price (the buyers or the sellers). When a stock is traded above the VWAP, it means that the buyers are in overall control of the price and there is a buying demand on the stock. When a stock price breaks and close below the VWAP, it is safe to assume that the sellers are gaining control over the price.

1. If VWAP is rising then it shows buyers in control
2. If VWAP is falling it shows sellers in control
3. If VWAP is flat then it indicates no one is controlling the market, price in a trading range

Used as Support and Resistance

Smart Money Buy below vwap and sell above the vwap if a large order came to market then they buy from VWAP, so when price unable to close below vwap and getting rejected from vwap and create a shadow or engulfing or outside bar this confirms the support and resistance

Price action and volume confirm the support and resistance

  

VWAP Trading Strategy USED TO DETERMINE THE MARKET TREND

Observations

1. For bullish trend days, the market stays above the VWAP.
2. For bearish trend days, the market stays below the VWAP.
3. For ranging sessions, the market stays around the VWAP which remains more or less flat.

These observations show that the VWAP has great potential for helping traders identify the market trend

Note: on avoid trading at the opening of a trading session:

After the market opens, the price bars tend to overlap with the VWAP. In the first five minutes, unknown heavy trading is happening between the overnight shareholders and the new investors and institutional traders. According to our method here, you cannot judge the market bias until the market tries to move away from it.

After volatility decreases around ten to fifteen minutes into the Open, the stock will move toward or away from the VWAP. This is a test to see if there is a large investment bank waiting to buy or sell. If there is a large institutional trader(smart money) aiming to buy a significant position, the stock will pop over the VWAP and move even higher. This is a good opportunity for us to go long. Opposite for short selling. If there is no interest in the stock from market makers or institutions or smart money, the price may trade sideways near VWAP. The best option would stay away from that stock.

Here, you’ll learn a price action method that you can apply immediately to your intraday trading to determine the market trend with the use of VWAP

TRENDING SESSION

Step1: Look for at least 2/3 candle in the same direction
Step2: When first-time price approaching VWAP, Look for a push away from the VWAP(the price should not stall at vwap)
Step3: Observe if that push enjoys follow-through or is rejected back to the VWAP level from the last swing high for an uptrend or last swing low for a downtrend

If they push away from the VWAP has good follow-through, assume a trending session. You can then consider momentum trades in the direction of the trend. If the market rejects the push away back to the VWAP, assume a sideways session. Consider taking mean-reversion trades in this case.

 

RANGING SESSION

A quote from James Dalton’s Mind over Markets: “Many knowledgeable professionals estimate that markets trend only 20 to 30 percent of the time. Failure to recognize this fact is one of the main reasons why a large number of traders don’t make money”. It is very important not to trade if there is no trend or no movements. Trading in a range only works if the range is large enough.

Smart money buys below vwap and pushes above vwap, then when price retrace to vwap see PA around vwap for continuous of existing trend or range market, If the market rejects the push away back to the VWAP, assume a sideways session.

The characteristics of sideways markets are

• Price often near VWAP, Point of Control, or other equilibrium prices
• Price stays the whole day in the opening range (the span of the first hourly candle)
• Inside- and outside-candles near each other
• Many crossings of VWAP
• High and low of the day hold though out the day

  

LIMITATION OF VWAP Trading Strategy

1. VWAP Trading Strategy Lags tend to increase as the day passes
2. Cannot be used at the opening of the day
3. Require supporting price action for entry

VWAP Trading Strategy PRINCIPLES

Two words are used here( PVWAP and VWAP). PVWAP is the end of vwap value of the previous day. VWAP is the current day VWAP. PVWAP can be obtained by plotting a straight horizontal line on the chart and looking where it was plotted at 3:30 pm. VWAP is obviously current day VWAP which can be obtained by plotting the VWAP indicator.

CONDITION

• Do not play stock long that is below the VWAP
• Do not play stock short if above the VWAP
• If way extended from VWAP, then a play reversal is okay but the target has to be the VWAP
• If the price is trading above PVWAP, it is bullish and we look for a buy entry
• If the price is trading below PVWAP, it is bearish and we look for a sell entry

CONFLUENCE: USE VWAP indicator with price action and volume

ENTRY

1. Buy Entry – any 5-minute candle that completely above both vwap and pvwap, buys entry will be above high of that candle.
2. Sell Entry – any 5-minute candle that completely below both pvwap and vwap, sell entry will be below low of that candle

NOTE:- Strategy doesn’t work on range-bound days

VWAP STRATEGY

VWAP REVERSAL ENTRY

VWAP REVERSAL FOR UPTREND

Rule

• The previous day should be a trend UP day
• Price should not close below last swing low
• Price should close above the VWAP
• Look weakness for morning move into previous days VWAP (PVWAP) level
• Faster the better
• The volume also important(prefer low volume move)
• Current day(ONE FIVE MINUTE) price should not close below the previous day VWAP(PVWAP)
• Take the trade only if I can get a good entry and a good risk/reward ratio.

Reverse for downtrend

ENTRY PROCESS

Step1: find the stock in a clear trend up (HH/HL) or trend down(LH/LL)
Step2: Weak retracement move towards PVWAP
Step3: When the first time price approaches VWAP, Look for a push away from the PVWAP (the price should not stall at pvwap)
Step4: Observe if that push enjoys follow-through or is rejected back to the VWAP level from the last swing high for an uptrend or last swing low for the downtrend

Price open and drive down with less volume shows sign of strength and stall at P VWAP and unable to close below the PVWAP

VWAP False Breakout (TRAP)

Strong Stock will stay and trade above VWAP if there is buying pressure from institutional traders. If a large investment bank is interested in taking the position, a stock will often stay above VWAP and keep moving above VWAP. But if there are no large institutions behind the stock, or if they fill all of their orders, then the stock will move back to VWAP and often “lose it”, meaning it will drop and trade below the VWAP. This is a sign for short sellers to start shorting it. On the other hand, when a stock below the VWAP is bounces back and breaks out above the VWAP, it means the buyers are gaining control and short-sellers desperately have to cover. Smart day traders chase the fleeing shorts by going long to ride the momentum and “squeeze the shorts”.

Price action and volume play a major role

VWAP First Pullback

Step1: find the stock in a clear trend up (HH/HL) or trend down(LH/LL)
Step2: Look for at least 2/3 candle in the same direction
Step3: When first-time price approaching VWAP, Look for a push away from the VWAP (the price should not stall at vwap). Also, look for rejection from the vwap
Step4: Observe if that push enjoys follow-through or is rejected back to the VWAP level from the last swing high for an uptrend or last swing low for the downtrend

This is not a holy grail strategy.no strategy will give you a 100% win rate. This strategy works 60-80% for me .so open chart and do practice before entry in the live market

I would suggest going through the below link for more clarification on

DISCONFIRMATION AND CONFIRMATION of support and resistance

Here, In this article, I try to explain in VWAP Trading Strategy detail. I hope you enjoy this article. If you still have any doubt then please watch the below YouTube video where I explain this concept step by step in detail.

VIDEO - VWAP SECRET STRATEGY