The power of VWAP play
Jan 05, 2022Volume Weighted Average Price (VWAP) indicator is one of the most popular and important technical indicator for day traders. VWAP is calculated by adding the dollars traded for every transaction (price multiplied by number of shares traded) and then dividing by the total shares traded for the day.
Volume Weighted average price = typical price x volume/cumulative volume
The good news is, we do not have to get our calculators to solve this mathematical equation. Our platform, in my case, DAS trader inc. And the rest of other trading platforms automatically calculates and draw the line for our charting analysis. As day traders, we need to be aware that VWAP is an indicator of who is in control of the price action, either the buyers or the sellers. Stocks above the VWAP means that buyers are in control of the price. Stocks below the VWAP means that the sellers are in control of the price action.
“Large institutional buyers and mutual funds use the VWAP ratio to help move into or out of stocks with as small of a market impact as possible. Therefore, when possible, institutions will try to buy below the VWAP, or sell above it. This way their actions push the price back toward the average, instead of away from it. Traders may use VWAP as a trend confirmation tool, and build trading rules around it. For example, when the price is above VWAP, they may prefer to initiate long positions. When the price is below VWAP they may prefer to initiate short positions”. (https://www.investopedia.com)
Once the market opens, stocks are very volatile. Hedge funds or investment banks might be selling or buying shares. Investors may want to take position in the stock as soon as possible before the stock moves even higher, or short the stocks before the stocks moves even lower. Scalpers would ride this momentum right at the open, a strategy called opening range break out or opening range breakdown (ORB).
After the stocks settled, meaning buyers and sellers have agreed on the logical price of the stock. As retail day traders, our job is to go where large institutions are accumulating or selling their shares. Retail traders are just not capable of moving the shares themselves (unless wall street bets are behind the move) which as technical traders, we don’t really have to spend thousands of hours researching which big investors are investing/selling shares, or which is the new wall street bets is the stock in play. Large institution buying or sharing large number of shares are not capable of hiding the number of shares they are selling/accumulating. This is the reason we pay attention to the volume bar.
Long: For my A-plus setup. The setup that I will be waiting for would be:
1. Pre-market that had gaped up of > 2.5%, this means that stock had created a biased of being a strong stock.
2. For the gaped-up stocks of >2.5 % I will ride the break of VWAP once I get the confirmation of high volume bar.
3. Set my 1st partial at 50% of the move, meaning if my target is $1.00, I will take profit once it goes above 0.50 cents and will move my stop loss at breakeven, or will take profit if their is resistance forming.
4. I will add to my share on the pull back on VWAP but also knowing that the 2nd pullback can be a higher risk trade compared to the initial VWAP bounce.
Short: For my A-plus setup. The setup that I will be waiting for would be:
1. Pre market that had gaped down to > 2.5%, this means that stock had created a biased of being a weak stock.
2. For the gaped-down stocks of > 2.5 %. I will ride the breakdown of VWAP once I get the confirmation of high volume bar.
3. Set my 1st partial at 50% of the move, meaning if my target is $1.00, I will take profit once it goes above 0.50 cents and will move my stop loss at breakeven or will take profit if their is resistance forming.
4. I will add to my share on the pull back on VWAP but also knowing that the 2nd pullback can be a higher risk trade compared to the initial VWAP fail.
Here are the trades that I took today using this indicator and shows how someone can be successful in trading with this indicator.
VWAP is the pink line in the chart below and I based my entry at the break of 15 min VWAP sometimes with confirmation of other strategy like opening range breakout/breakdown which gives me a good risk to reward ratio.
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