VWAP: The Ultimate Day Trading ToolVWAP stands for Volume Weighted Average Price. In simple terms it is the average price weighted by volume. Don't worry I ll explain.
The Calculations:
Firstly the average of the high, low, and close: (H+L+C)/3, is calculated (technically known as the typical price). This typical price is multiplied by the candle's volume (depending on time frame used). The cumulative total is calculated with each successive candle. Cumulative volume is also calculated along with this. Then divide the cumulative total of price-volume by the cumulative total of volume.
And we get VWAP. Fresh calculation start every day at 9:15am and end at 3:15pm.
Sounds difficult?? Simply apply the tool on a chart and you are ready to go.
Applications:
Vwap is used by institutional players having huge orders. VWAP helps these institutions determine the liquid price points, near the vwap, for a stock over a very short time period. VWAP serves as a reference point for prices for one day. As such, it is best suited for intraday analysis.
For me personally, it works best on any where between 1 minute to 5 minutes timeframes. I suggest you to read the full post before reaching at conclusions :)
Two Strategies:
Hit and Run:
We buy as the price pulls back to the vwap. We wait for a signal candle reflecting buying interest and pull the trigger. Here we place the stop below the vwap or the previous swing low, whichever is lower. The advantage is that on this lower timeframe stop will be small. For exits use targeted approach. One can also trail.
The Value Trade:
Buying below the vwap is generally considered as a good buy.
Two variations--
1) As the price breaches vwap wait for price to also break an important swing low for the day with immediate reversal supported by volume. Buy above this high volume candle with a stop below it.
2) Price breaches vwap and makes a low X. Wait for the price to pullback to vwap (Y) and then head lower again to X or make a higher low near X. Here Y would be the entry point. with stop at X.
Both these strategies can also be used for shorting a stock. You just have to read it upside down.
# Also keep in mind that day trading is not as easy as explained above.
1) We also analyse daily, hourly and lower time frames before pinpointing entry on 1 minute chart.
2) Trades taken in the direction of trend yield handsome returns.
3) We also have to take into consideration the overall indices movement.
4) Notice if the stock has been out-performing the indices.
# In trading world, nothing works 100%. So active trade management and efficient money management is essential to avoid unbearable losses.
As I always say, "Greed and Fear are traders' enemies". We can't eliminate them but they can be managed patiently.
Before applying this strategy you should first test it for few days to learn trade execution. I suggest you to use them on top gainers and losers. One has to be fast and fully concentrated in the morning. But if you missed the morning move, that does not mean the end of world. Wait for the next opportunity and grab it. Just practice, practice and practice more. It ll make you perfect.
Hope this post will enhance knowledge of some traders.
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Regards
