Many traders find a good entry and exit with precision in volatility, but most find it tricky. Without knowing the positioning of the price in terms of its average against history, easy mistakes are made that later end up costing too much.
It is the Volume Weighted Average Price, a strong indicator that brings together price and volume to give a clear picture of how much average price a security has traded at during the day. VWAP is a benchmark for the high-grade institutional traders, and this puts retail traders on top when used properly.
In this article we will open a master VWAP trading strategy for big gain in your skills of day trading. By the end of this guide you will know how to leverage VWAP effectively to identify potential entry and exit points, thereby enhancing your outcome of the trades.
Understanding VWAP: The Foundation of the Strategy
VWAP stands for Volume Weighted Average Price. It calculates price put together with volume of trades to generate one single line on the chart of prices. This line is a moving average of a dynamic kind and gets reset daily, hence, it becomes a very important tool for day traders.
Why VWAP Matters:
- Institutional Benchmark: From the benchmark, one notices that institutions try to execute their trades closer to the VWAP to get a reasonable price. The price will therefore fluctuate significantly on either side of the VWAP when it touches the benchmark line.
- Market Sentiment: A price traded above the VWAP will say the market is in a bullish trend. Any price traded below the VWAP means the market is in a bearish trend.
- Support and Resistance Levels: VWAP often acts as a good support or resistance level, hence sometimes called a critical area to enter or exit the trade.
The VWAP Trading Strategy: Recipe
Setup your Chart
To get best out of the VWAP trading strategy, set up your trading platform to include the VWAP indicator. All popular trading platforms – TradingView, MetaTrader, and all others support VWAP.
- Chart Type: One-minute or five-minute chart to capture intraday price movements
- Timeframe: Focus on day trading, since VWAP is calibrated at the beginning of every trading day
2. Understanding VWAP and Standard Deviations
While VWAP will provide us a core average price, adding some intelligence to our strategy involves adding standard deviations around the VWAP.
- Upper and Lower Bands: Add two standard deviations both above and below the VWAP. These bands can help you spot prices that are utterly extreme and may tell you whether the price is overbought or oversold.
Trading Strategy
Longing Conditions
When the price falls beneath the lower standard deviation band, that means it is also oversold. That is the time to get long.
- Entry Signal: Wait for price to touch or violate the lower band and reverse for example the bullish candle formation
- Target Price: Sell when the price is reached or exceeds VWAP or the upper standard deviation band.
2. Selling Conditions
In this case when the price is above the upper band of the standard deviation, that should signal overbought conditions for the security.
- Entry Signal: Enter your short position when the price touches or crosses to the upside into the upper band and begins showing signs of reversal, such as one or more bearish candles.
- Target Price: Attempt to close out your short when the price hits the VWAP and particularly when it crosses down into the lower standard deviation band.
Essential Points
- Timing is of the Essence
Do not trade in the first 15-30 minutes of a market open. This is typically inherently highly volatile and less easy to discern the actual direction of prices. It is better to wait until a trend is established by the market before using the VWAP strategy. - Confluence with Other Indicators
Since VWAP is very powerful, it makes sense to use it in conjunction with other technical indicators to increase the accuracy.
- Moving Averages: Adding this strategy with moving average crossovers will make it more effective. For example, wait for the VWAP to coincide with a moving average crossover before entering your trade.
- Volume Analysis: Be aware of the surge in volume that will act as confirmation of the trend strength. This will give you the extra confidence to enter your trade.
Trade Execution: Step-by-Step Guide
- Monitor the Market: Keep watch on price action when approaching the VWAP and when reaching standard deviation bands.
- Identify Entry Signals: Look for confirmation signals such as candlestick patterns or volume pick-up.
- Place Stop-Loss Orders: Set the stop-loss slightly above the upper band for a short position and below the lower band for a long position to limit your losses.
- Take Profits: Close your position when the price crosses the VWAP or reaches your desired trade with standard deviation bands.
Conclusion
In a nutshell, if you can master the VWAP trading strategy, you are going to become a much better trader. Learning how to combine VWAP with standard deviations will uncover for you that overbought and oversold conditions, making you a wiser trader.
While trading this strategy, keep in mind that no indicator is a guarantee. Always combine your VWAP analysis with solid risk management practices and market conditions to boost your trading success.
Now that you have a pretty clear view of the VWAP trading strategy, it is time to put this into your trading routine. Keep on refining this approach and introduce even more tools and techniques to take the game up another notch.
