Back to: Trading with Smart Money
In this article, I am going to discuss VWAP Trading in detail. Please read our previous article where we discussed Multiple Time Frame Analysis for Intraday Trading. At the end of this article, you will understand the following pointers in detail.
- What is VWAP Trading?
- A complete VWAP Trading system
- 2 VWAP Strategies
WHAT IS VWAP Trading?
Volume weighted average price (VWAP). 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.
Two words are used here (PVWAP and VWAP)
PVWAP is the end of vwap value of the previous day. VWAP is a 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.
VWAP day Trading system
Step1: location (refer to multiple time frame trading video)
- define a trading range(NEAREST SUPPLY AND DEMAND ZONE)
- where price open, where wants to go(with respect to nearest supply and demand zone)
Step2: relative strength and weakness compared to sector and index(refer to intraday trading course part 1)
If the respective sector is negative choose weak stock to sell. If index (nifty) negative. Choose weak sector
Step3: MARK OPENING RANGE
Mark opening range (first high and low of the day)
Step4: condition and entry type
Rules for entry
- Do not play stock long that is below the VWAP
- Do not play stock short if above the VWAP
- If the price is above both PVWAP AND VWAP look for long
- If the price is below both PVWAP AND VWAP look for short
- A five-minute candle should no closed below vwap for a long entry. reverse for short entry(why that shows day going to be a range day)
- 1st candle of the day should be heavy volume. Why heavy volume on the first candle of the day? We are trying to identify what the SM sentiment is for the day. If SM wants to buy stock, we would see that on the open with heavy volume and a strong directional move. Stock may gap at the opening. This shows that stock may trend up rest of the
VWAP PULLBACK entry type
- VWAP PRICE CORRECTION
- VWAP TIME CORRECTION
If conditions are valid
Step6: Active trade management
- Target exit
- Reversal development exit
WHAT IS VWAP PULLBACK STRATEGY
FIRST UNDERSTAND WHAT IS PULLBACK
A pullback is a price movement that moves in against the trend. It is a temporary price movement before it resumes back into the main market direction. Pullbacks are sometimes referred to as price Corrections or retracement.
VWAP PRICE PULLBACK ENTRY
CHARACTERISTICS of WEAK PULLBACK
- Correction(depth of pullback) must be small and without strong momentum candlestick
- Volume decreases / low volume correction
- Great mix of red and green candles with light volume
- Closes towards the middle with wicks
LOGIC OF VWAP PRICE PULLBACK ENTRY
If a stock moves strongly in the morning supported by smart money, then it respects vwap. When a stock is traded above the VWAP. If VWAP is rising then it shows buyers in control. When a stock is traded below the VWAP. If VWAP is falling it shows sellers in control
Step to follow
- Find the stock in a clear trend up (HH/HL) or trend down(LH/LL). Look for at least 2/3 candle in the same direction with a high volume
- THEN wait for the price to a pullback(WEAK) towards vwap
- Check whether the price was rejected from vwap or not. (look for rejection from vwap)
- If rejected go with the initial move
- Don’t buy aggressively until this stock heads in the initial direction.
- Check price action around opening range high or opening range low
- Those stocks that trade back above the opening range price are likely to go even higher. This is because of new bulls entry plus a short cover buy order .so after the reaction period market set the tone of the morning trend
TIME CORRECTION(Stock to digest the directional move is through a time correction. In a time correction the stock move in horizontal, low volatility trendless manner. Generally, a strong trend has time correction. Because the pullback is shallow, it’s difficult to time your entry on a pullback. Instead, you can look to trade the breakout
What happening here is
- The initial upward movement shows the direction of major interest. Then a stock meets resistance and consolidates under this level. If the stock is strong enough to stay close to the resistance level without sharp retracement, it means that the path of least resistance is still upward and that the stock is likely to continue in the same direction as soon as it digests the distribution
- Smart money slowly and discreetly accumulates its positions in sideways price action. There they can hide their activity perfectly. A sideways price action is a place where big institutions are getting ready for action
- Once bulls are confident that the bears will fail to reverse the trend, bulls buy again with a tighter stop loss
- We prefer the range of the consolidation to be narrow
Step to follow
- Find the stock in a clear initial move with high volume.
- For bullish breakouts, look for a price to hug the top of the range. For upward breakouts, trade only those situations where the price closes above the middle of the opening range most of the time. Downward breakouts from the opening range do best when the price resides below the range’s midpoint most often
- Price should above both PVWAP and VWAP
- Trade with the trend. In a bear market, downward breakouts tend to make more money than upward breakouts in intraday trading. In bull markets, upward breakouts make more money.
- Look Break out with volume and clean candle
- After the breakout the stock exhibited bullish price action. I mean breakout should follow through
What invalidates our setup?
- Price takes too much time during consolidation
- Price should not break the initial move high(for long entry)during consolidation for an upside breakout
- The first candle has both upper and lower long wick
Please watch the following video if you want to learn and understand the VWAP Trading concept in a better way.
In the next article, I am going to discuss the Opening Range Trading Strategy in detail. Here, in this article, I try to explain VWAP Trading in detail. I hope you enjoy this article. Please join my Telegram Channel and YouTube Channel as well as my Facebook Group to learn more and clear your doubts.