Three Explosive Anchored VWAP Strategies + Explanation Video
Tag: VWAP
Most anchored vwap strategies are centered around swing trading. However, the strategies used on daily charts can also become major support or resistance for day traders.
In this post, we’ll show you how to develop your edge with three anchored vwap strategies and explain the theory behind the indicator. But before we do, take a moment to watch the video below on how to apply this indicator to your trading tool belt.
VWAP vs. Anchored VWAP
What’s the difference between the two?
VWAP
For starters, you need some understanding of what vwap is. It stands for the volume weighted average price. As a lagging indicator, it tells you where the majority of buys and sells for any given ticker have occurred on average as price evolves throughout the day.
It’s generally used for day trading.
As an example, imagine a stock that runs from $2-$5 and then regresses to $2 by the end of the day. If the majority of the volume came at the highs, then your vwap indicator will likely remain high on the day’s close. Whereas, a simple moving average will fluctuate more as it is based only on the price.
SPRT 50ma vs vwap
Notice in the image above, the red vwap is much smoother than the yellow 50 moving average. The addition of volume in the formula adds a different weighting element than moving averages.
For a deep dive on vwap, be sure to check out our ultimate guide on the subject.
Anchored VWAP
How the two differ involves the anchor. VWAP is a moving indicator used intraday – starting with the first bar and ending with the last of the day. Anchored vwap, on the other hand, is tethered to a specific bar and displays the cumulative struggle of bulls and bears from that bar.
Developed by Brian Shannon, CMT, the anchored vwap (similar to traditional vwap) is more of a trend indicator. Shannon discovered the idea that certain days on a chart were more important than others. By anchoring vwap to a specific day, it could reveal the longer term support or resistance of bulls or bears who may have initiated positions either on that day or near the avwap later on.
These events could be anything from earnings to news releases, or simply high volume days on the chart. Similar to a pivot point or vwap boulevard in that it is often a firm psychological resistance level in the market, it differs in that it isn’t as static. Anchored vwap, while it sounds stationary, evolves as price and volume change. The fixture is simply the starting point of the calculation.
What Does Anchored VWAP tell us?
Much like volume at price, anchored vwap can tell us the price at which most traders are commonly positioned. Let’s use a visual example to explain this:
Anchored VWAP for SPRT
In this example, we anchored vwap to the largest prior volume day on the chart. Volume is significant, and whatever catalyst caused this move is inconsequential. The important thing is the volume traded on the day.
When we anchor vwap to this day, months down the road it becomes significant again. SPRT had a very high short interest — above 60%. This is significant, especially if any institutions were shorting the stock on the large volume day in March. As the months went by, we see that there are few opportunities for all of those shares to be covered.
In other words, liquidity dried up. That is, until July and August came around and demand for the stock began to push it higher.
As price reached the prior anchored volume weighted average price, we begin to see a lot of turmoil in the price at this level. Resistance first, then support, and support again – shown by the arrows.
The Significance of Anchored VWAP
The significance here is the underlying revelation of who is underwater and who is comfortable. Shorts had the upper hand for months, but once the price of the stock began to climb back to their “average” price, it became clear that shorts were in trouble. Millions of shares aren’t covered easily when a stock float is as small as 15 million, like SPRT.
This begins the game of averaging up to salvage the position. But with every effort to re-average, the pot of water gets hotter. And if the demand doesn’t let up, the end result can be catastrophic as margin calls pour in and brokers start cutting their losses by covering their client’s position. For more information on this, see our post on float rotation.
This can work in favor of shorts as well. If buyers and bag holders are averaged above the current avwap levels, it is likely the key average might provide resistance on any rallies into it. Will discuss this in an example below.
Three Anchored VWAP Strategies with Real Examples
Let’s take a look at three specific strategies you can use with the anchored VWAP indicator.
1. Red to Green Moves
This is a very simple strategy like the example we used above with SPRT. The strategy revolves around a move from being below the avwap to being above it. In other words, what was once resistance has become support, or longs who were red, are now green.
Let’s look at a recent example with AMD. Notice how AMD had a huge run up and then stalled. First, we anchored the vwap to the all-time high candle. Then, we allow time for the stock to pullback and consolidate. Here is what this looks like on a daily and hourly chart.
AMD red/green anchored vwap strategy
Notice that the avwap resisted the price for a number of days until the last two days. The astute trader could have kept this on radar, watching the consolidation, waiting to buy the “red to green” breakout at avwap.
The volume picked up on the break through this avwap level. Much like we saw with SPRT above, the importance of this level is on display as buyers step in and shorts realize they need to cover in case their average diminishes with any further price movement upward.
Other Signals to Consider
As with any strategy and indicator, the more favorable signals you can find, the better. In the example above, you also have a reverse head and shoulders pattern forming, along with a nice Volatility Contraction Pattern and a Pocket Pivot as well.
We won’t go into those in detail here, but rest assured you can find any number of other signals like moving averages or patterns to help confirm your avwap strategies.
2. Green to Red Moves
The great thing about vwap is that it typically becomes the precipice of a move in either direction. To that end, you can play avwap to the short side once a support is broken. Hence, the longs that were once green are now in the red.
AMC is a hot momentum stock catching a lot of popularity lately. It provided such an opportunity to go short as YOLOers and HODLers piled in as it ripped to new highs. Later it failed at the anchored vwap. Here is the chart:
AMC Green to Red avwap strategy
As you study the chart, pay close attention to the story it is telling you. From where we anchored vwap at the highest volume and price candle bar, a lot of retail buying is occurring here as shares are being sold by those who’ve been holding from a much lower price.
Shares are being dumped, but are also being bought. The result is a tug of war in the ensuing weeks. As you can see, avwap tried to defend, but bears eventually won.
The avwap gives us the backdrop for the story between the bulls and the bears.
Intraday Trades
Over the course of the next few weeks, we see that this anchored VWAP level provided some support but was eventually overcome by too much supply at these high prices.
Interposing this important line on your intraday chart could have alerted you to a perfect shorting opportunity as AMC retested the underside of the avwap line on July 6 denoted by the blue downward pointing arrow.
AMC 1 Hour Chart
Looks pretty clean, eh? We think so, too.
Now look at the one minute chart at this level. A bit uncanny how accurate it can be.
Anchored vwap resistance
Like taking kid from a candy, the stock tried to rally into this red anchored VWAP level, but couldn’t survive the supply.
Later on in August, as the consolidation continued and matured, a rally brought the price of the stock back to this avwap level. Let’s look at it one more time to see what happened:
AMC Green to Red avwap strategy
One of two strategies could have been employed here. If you were long for the rally, it provided a perfect profit target. If you’re short biased, it provided yet another opportunity for an intraday short.
3. Range Based Trades Using Anchored VWAP
Range trading can provide fantastic opportunities for short term trades. Often, trading ranges can be easily denoted by a quick glance at a chart identifying support and resistance. But with avwap, you’ve got an extra layer of confirmation to add to your trades.
In the example below, we’ve tethered vwap to the prior high made before the trading range began. This gives us a nice base for the range as it consolidates for the next move. Then with the formation of our first retest of those highs at the blue downward arrows, we can anticipate the upper bounds of the range by drawing a line.
Here’s what it looks like:
AMD anchored VWAP trading range strategy
As you can see, this would’ve generated multiple trade signals as price bounced between the highs and lows of the range. Each level provided support or resistance for a number of weeks.
It is within these predictable patterns that short term swing trades and day trades can rack up significant profits before breakouts occur.
How to Practice With the AVWAP
Practice is the key to success in the markets. It isn’t worth putting your hard-earned money to risk in the markets until you’ve mastered a pattern.
One of the best ways to practice with avwap is to throw it on your charts and move the “anchor” around and see what happens. Where does it support? Where does it break? Can multiple avwaps on a chart give bigger clues to where long term money is located?
Like Brian Shannon, we recommend taking the indicator and tagging it to the significant areas of the chart like highs, lows, big volume days, events, etc.
When practicing in the simulator, you can find anchored VWAP in the studies tab. It will pop up a settings window that will allow you to enable other features like standard deviations, anchor selector, color, and more.
Anchored VWAP Indicator
As with any indicator, the default settings are usually the most popular, but it never hurts to play with it to get a feel.
Conclusion
We hope you’ve found this helpful. Be sure to give these strategies a go in the simulator and let us know how successful you find them to be!
VWAP Boulevard has become all the rage in the fintwit community lately. Discovered, named, and taken mainstream by Twitter phenom @team3dstocks, thousands of day traders are now implementing this strategy to trade momentum stocks. In this post, we’ll uncover the long and short of the strategy, plus offer a few helpful real-life vwap boulevard trading examples.
If you’re unfamiliar with the basics of vwap, you might start with our Ultimate Guide to VWAP first.Also be sure to check out our complimentary articles on the Kill Candle and 1-3pm Bloodbath.
As a primer to the content below, watch this quick YouTube tutorial where we use our VWAP Boulevard drawing tool in TradingSim to practice this strategy!
The Mysterious Man Behind VWAP Boulevard
With any good strategy, an edge in the market starts with backtesting. You can either pay for the data and analyze it, or you can spend years collecting your own data as you trade.
Fintwit personality @team3dstocks, who goes by AllDayFaders, is the man who discovered the vwap boulevard strategy through years of collecting his own datasets.
to be honest there's nothing special about it. u'd have the exact same understanding of the game if you poured in the same amount of time that i did. I was OBSESSED with trying to master all day faders. it used to consume my entire day. Put in the time = u'll get the same results https://t.co/u9paD18Dff
Reading his Twitter posts are lot like getting a noogie from the uncle whose standards you know you can’t live up to. It hurts, the delivery’s a little crass, but you know it’s all true.
Other times, he’s like the older brother or dad you want to imitate. The successful one, giving you the advice you know you need to hear.
Ultimately, he’s very active and benevolent in the daytrading world, doling out his nuggets of wisdom only at the expense of your ego. So be sure to frame your questions wisely, he’s backed up 6 months in responding to his DMs.
Questions to ask urself when tracking data:
✅how often does this setup occur ✅at what time does it usually occur ✅what is the avg range ✅what signal/indicator usually marks the top/bottom of this setup ✅what are the fundamentals usually like on this setup?#BearTipOfTheDay
In truth, a lot of his posts, especially the #beartipoftheday, can be very helpful and encouraging to anyone striving to be a consistent trader:
How It Got Started
When asked how he finally stumbled upon the strategy, he says “each time a low float ticker had the audacity to hit the scanners, I would add it to my database, then pick it apart after hours.”
“Like a mad scientist,” he goes on to say.
Excel spreadsheets galore. He’d break everything down that he possibly could, “analyze EVERYTHING” about the tickers he saw on the screen.
What is EVERYTHING, you’re wondering?
“The chart, the price action, the SEC filings, the fundamentals, the volume, etc.”
@team3dstocks talking about the work it takes to find an edge in the market
After years of analysis, it eventually led him to the highest volume days on small cap stocks. These securities that had been selling off or consolidating for a period of weeks or months after huge runs, would often gap again in the premarket many weeks or months down the road.
AllDayFaders (ADF) had discovered a pattern.
How to Find the Boulevard
These “penny stocks” as they are known to some, have a tendency to make huge intraday runs from time to time, sometimes doubling, tripling, or more in a single day, only to fade off and close lower the very same day.
VCNX runs into resistance at #vwapboulevard after a 100%+ intraday run
They were running into an area of prior volume-weighted price resistance from previous high-volume days.
If he tracked backwards on the daily chart until he ran across a prior high volume run, he could use that day’s intraday vwap as a guide for the current day’s trading levels.
The Result
According to ADF, the probability is around 75-80% accuracy that the stock will run into serious resistance at these levels. And the reaction to the levels will dictate the action he needs to take — going long or short.
Along those lines, ADF has found that 70-80% of the “best faders” die in the premarket.[efn_note]https://twitter.com/team3dstocks/status/1372869249308491776?s=20.[/efn_note]. This might be a limiting factor for who can trade these type of securities. But for experienced day traders with the right tools, it can provide a great opportunity to profit before the market opens.
Outside of the premarket hours, ADF admits that the second best time to short extended stocks is “by 10am.” But only if the volume is climactic.
Those are some pretty decent odds for trading. And anyone who trades low float stocks knows how difficult they can be to trade. The temptation is there for quick and massive profits. But the risk of heavy losses looms large.
Knowing that, the #vwapboulevard strategy can be a good tool to increase your odds of success and mitigate risk. Let’s dig a bit deeper into it.
What is the VWAP Boulevard Formula
It’s quite simple actually.
Note that ADF uses and recommends ThinkorSwim for his calculation, so he references TOS a lot. Nonetheless, it can be found on just about any charting platform.
Essentially identify the intraday vwap level for the prior highest volume days that the stock ran. Draw your line there, then wait for the current premarket or intraday action to reach and react to that level.
A simple formula right? In principle, yes. But that is definitely the simplified version.
GAP Percentage
As a rule of thumb, ADF also recommends only trading extreme gaps of 50% or more.
ADF explaining the gap percentage
Years of price action trading experience will likely help as well. After all, you will need to know how to interpret the security’s reaction to these levels and have the discipline to put on a successful trade.
Not to mention being able to handle extreme volatility.
Along these lines, in order to help qualify the trade better, ADF employs a volume forecasting indicator.
What Is a Volume Forecasting Indicator
A volume forecast is essentially a way to predict the “end of day” volume earlier in the trading session, and at different time intervals.
Niv Goren has done a fantastic job of explaining this unique indicator and how to create your own version on his site inthemoneyadds.com. Like others, his inspiration came from AllDayFaders’ influential Twitter posts.
Volume Forecast Indicator from inthemoneyadds.com
In his blog, Niv describes the step-by-step process of collecting data on prior high-volume, low-float runners, then choosing a predictive model with which to run the calculation. The results are then correlated “between different ratios and end of day results,” he says.
Interpreting Data
Understandably, running calculations like this for different time intervals, collecting the data, and analyzing it all may seem daunting. For that, Niv has created his own indicator that he sells through his site with tips on how to interpret it.
The goal with the indicator, however, is not necessarily to “know” the end-of-day volume. The goal is to understand how quickly the ratio is expanding between current volume and the end of day forecasted volume. Especially at the start of the session.
ADF coaching on how to use Volume Forecast
We then need to ask what this can tell us in relation to vwap boulevard and other factors. How quickly the forecast expands might tell us whether or not the stock may continue squeezing.
Predicting Tops
To understand the timing of his trades better, Niv has plotted a histogram to determine the time frame in which the majority of small cap stocks reach their intraday peak.
Interestingly enough, his findings are in line with AllDayFaders’ “by 10:00am” statistic.
Niv’s site includes a lot of varied and useful data, i.e. where you should cover your short, some special considerations, etc. Click the chart above, it’s worth a read if you have the time.
The last thing worth noting with the volume forecast indicator is how it might forecast float rotation.
Float Rotation
Serious small cap traders pay close attention to float data.
Professional day trader Nate Michaud of InvestorsUnderground.com coined the term after suffering a few losses earlier in his career. Nate describes it as
“the term we use referring to names with tightly held float when it begins to trade two, three, ten times and beyond the listed float causing shorts to ‘add add add’ in disbelief only to send it higher.”
Nate Michaud
So, what exactly does this mean and why is float rotation important?
Essentially, the available shares are being churned rapidly throughout the day. Contextually, if the stock is finding support at vwap boulevard and building sound bases on the way up, this could spell trouble for shorts who are, like Nate says, “add add adding” on the way up.
We’ll see an example of this in a moment.
Suffice it to say, that averaging up or down can be a very dangerous and fast way to lose money.
This goes back to ADF’s warning:
AllDayFaders warning on getting squeezed
Let’s take some examples from recent months to see how the pattern actually plays out.
VWAP Boulevard Long Examples
In order to visualize this and trade with the correct “boulevard lines,” we’ll take a few examples of longs and shorts at these levels and examine them.
Long Example 1 – SPI
First, let’s jump back in time to the morning of September 23, 2020. We run our premarket scan which includes market caps lower than 100m, or small cap stocks. We notice that SPI hits our %gainer list with a 200% gap in the premarket.
Here is a look at SPI’s premarket chart:
SPI intraday chart 9/23/2020
The question now is what happens at the open, right?
Sure, we could likely place a trade with the information from this 1-minute premarket chart. There are some key levels in the premarket and so forth.
But why are they significant? Is there more to the story that could help us? There is.
Let’s now zoom out to the daily chart, and try to find our highest volume days.
Daily High Volume Bars
SPI daily chart highest volume days
As we can see from prior months, there are a number of really high volume spikes associated with big advances. These are the clues we’re looking for.
As part of your premarket routine, when a stock that fits your criteria hits the scanners, you’ll want to locate these days on the chart.
Now comes the fun part.
You should be able to overlay a vwap indicator and find the intraday vwap levels for each of these days. Most charting platforms will have this. AllDayFaders prefers TOS charts and finds them more accurate.
Adding VWAP Boulevard Lines
If you need to get a little more granular, you can go down to the hourly or 4-hour chart to find the intraday vwap levels for the prior high volume days.
We’ll do this now using the 4-hour chart below.
SPI 4-hour chart with vwap indicator
In the image above, VWAP is the red line. What we’ve done is drawn horizontal lines at these vwap levels that occur during the highest volume days on the chart, typically near the closing vwap price.
As you can see, we have significant volume at $1.70s on the low end, $3.30s, and the $4 area.
!!!Be sure to superimpose the horizontal lines on the smaller time frames you’ll be trading on!!!
Now that our #vwapboulevard lines are drawn, let’s get back to that 1-minute chart and see if these lines come into play with SPI’s premarket price action.
SPI intraday 1-minute with vwap boulevard lines
Sure enough, these lines end up being significant. Before the open, we have a test and fail at the upper vwap boulevard at $4, as well as some significant support and resistance with the $3.30 line.
Timeliness
Now, as ADF has stated, “if volume doesn’t fall off a cliff by 10am,” we want to either get out or look for a long setup. If the top line of $4 is our upper vwap boulevard, then we need to see lower prices soon if we are taking this short.
By 9:30am, we are on the “frontside” of the trade. In other words, we are making higher highs and higher lows.
Fast-forwarding to 10am, we see the action getting hotter as volume continues to persist. We put in a double bottom at one of our #vwapboulevard key support areas of $3.35 then retest the red vwap intraday line.
SPI 10am vwap test
At this point, volume isn’t really breaking down yet, which should give us pause for concern if we are short from the top. At the very least, we’ve identified our stop loss areas depending on our short entries earlier.
Volume Forecast
Likewise, if we have employed the help of the volume forecasting tool, it might be a good time to check in and see what our percentage is, or how quickly we have or have not rotated the float.
On the flip side, bulls may be looking at this for an opportunity here, risking against the key $3.30s line and intraday vwap for a long entry.
Continuing forward in time, let’s see what happens by 10:30am:
SPI intraday at 10:30am 9/23/20
In the wise words of Scooby-doo, “ruh roh!”
It was supposed to fail wasn’t it? Volume is increasing. The stock is now up 342% percent. If you’re short, what do you do?
This is the purpose and benefit of the vwap boulevard strategy. Not all the key levels had broken down. Our guides were there giving us information to either cancel our short, or go long.
Who Is Trapped
In light of this, you should step back, look at the big picture now, and ask yourself, “who is trapped?”
AllDayFaders explaining trapped shorts and trapped longs
That’s the beauty of vwap boulevard, according to ADF. It presents us with another layer of the market in order to hypothesize on this question.
In other words, what is the meta trade? Or, the trade behind the trade. What’s going on in the big scheme of things with buyers and sellers that can give us confidence going long or short.
@team3dstocks explains supply/demand
Using this thought process, whoever was averaged in short at the levels on the chart above are now in deep water.
At this point in the day, SPI has traded 82.1 million shares. It only has 16 million shares in the float. That means it has churned through the available shares over 5x since the day began.
That’s a lot.
Float Rotation
Let’s revisit why this is significant.
As Nate Michaud points out, a float rotation is like a “refresh of shareholders.” As this happens, “the stock’s trading behavior changes.”
In a great blog post on this subject, he gives the example that at each successive level you find new short sellers who replace the ones who’ve blown out at the prior levels.
ADF describes it this way:
Imagine u're short 100K shares on a lowfloat stock that can rip a few cents on just 10K share orders.
Ur avg is $3.00 and the stock rips to $4.00.
There's no way in hell u're covering that high (the slippage will be massive, not to mention u're scared to cover at the top). https://t.co/dzFOIxIBFz
Therefore, if longs are in control from below with a better average and a better foothold on the available shares, short sellers are really at their mercy. They are all scrambling for liquidity to cover their shorts.
This adds fuel to the fire as they average up, only to cover higher while the price continues to rise on lower supply. In the meantime, new shorts come in to sell the stock at higher prices believing it is too overbought, yet they are eventually squeezed, too.
The Carnage
Why does ADF recommend getting out of the way if you’re short when this happens near vwap boulevard?
See for yourself:
SPI 9/23/2020 massive short squeeze
At $40 those shorts near the $4 vwap boulevard are probably wishing they’d gone long instead. Or at least covered. Wouldn’t you say?
VWAP Boulevard Long Example 2 – EYES
The stock symbol EYES from March 5, 2020 gave us another great example of how important vwap boulevard can be. For the sake of time, I’ve identified the vwap level for the three highest volume bars on the daily below.
EYES daily chart with vwap boulevard lines
These levels occur at $1.70, $2.56, and $3.46, give or take a few cents. Again, this is what you do after you’ve seen EYES hit your small cap scanner in the premarket on considerable volume and %gain.
If you’re going to trade this strategy and don’t have a built-in indicator, you’ll need to draw these lines. At the time of publication, there are a few free vwap boulevard indicators available now, from scriptstotrade.com and thevwap.com.
The Premarket
Now, let’s look at the premarket:
EYES intraday premarket with #vwapboulevard lines
Notably, EYES hit resistance at the $2.50s level and gets rejected in the premarket. But like our SPI example above, it isn’t putting in lower lows yet.
ADF makes a note of this rejection on his Twitter feed on this day, calling out the exact levels we’ve drawn above:
ADF callout of VWAP Boulevard on EYES 3/5
Later that week, a follower of ADF notes the other level of $3.45 that we also identified above. It was a lower volume day, which ADF claims would likely have been less significant.
$EYES Correct. jan 26's vwap ($2.56) had 20M volume, and was the next closest bagholder level.
Dec 23 's vwap ( $ 3.41) only had about 5M shares traded that day.
Which day do u think would have the most bagholders?
For this reason, we should assume that the $2.56 level was the key for our long or short thesis, but could still expect some turbulence at the $3.45 level if it got there.
Obviously this is Long Example 2, so there is no spoiler that the stock went higher. Let’s check out the move it made.
EYES intraday at 10:10am March 5 2020
Before we see the whole day, let’s pause here at 10:10am.
The Crossing
Like SPI, VWAP Boulevard couldn’t stop the bulls from crossing — no pun intended. And as we know that most of these should fail by this hour of the morning session, it was time to cover and walk away if you were short.
To that end, ADF tweeted at 10:10am with this exact warning: “Stop out immediately.”
Wise words from the master himself, as EYES ripped higher throughout the day, all the way to $10 before noon.
Outlier Moves
We call these outlier moves. They happen from time to time. Nate Michaud does a great job explaining the thesis and fundamentals behind these moves in a great YouTube video.
For all intents and purposes, at 500% in a single day, EYES was definitely an outlier move.
EYES full intraday swing after crossing vwap boulevard
Before we move on to shorts, take another look at the last line we have drawn at the $3.46 level for EYES (the upper black line). As mentioned above, this area was a bit of a last resort for shorts from a prior day’s vwap.
It offered one more opportunity to trap shorts and then simply grinded higher.
So the stock pullsback & just stalls around $3.50 . This forms a flag pattern, attracting more FOMO bulls.
Game over.
Now the shorts are bent. They cant get out. That's how squeezes begin. That's how winter comes for shortsellers.
The above examples are outlier examples of what CAN happen. Not all low float stocks will make huge moves like this.
Keep that in mind and trade at your own risk.
Long Recap
Identify gappers in the premarket (ideally 50%+)
Filter by float size (smaller caps)
Target stocks with enough liquidity (volume)
Zoom out on the daily or hourly to find high volume days
Draw horizontal lines on the highest volume day’s vwap
Go long if vwap boulevard becomes support
VWAP Boulevard Short Examples
VWAP Boulevard wouldn’t be what it is without his namesake, AllDayFaders. After all, the larger percentage of these stocks fade hard after reaching their peak in the premarket, or by 10am.
With that in mind, let’s glean what we can from two real-life examples.
Short Example 1 – VCNX
Fading all day was certainly the case with VCNX on February 19, 2021.
Since we have already discussed how to find and set lines for vwap boulevard, we’ll just show the daily chart with them already plotted to get started.
VCNX 2/19/2021 VWAP Boulevaard
The Premarket
As can be seen in the next image, VCNX was gapping nicely in the premarket on heavy volume. By 9:30am EST, it was up over 100%.
However, it had not yet reached vwap boulevard:
VCNX intraday #vwapboulevard
This doesn’t mean that it is guaranteed to run into vwap boulevard. Obviously, there are no guarantees in the market.
Nonetheless, if this stock is on your radar from the premarket scan, you want to be aware of the key levels it could run to. If you’re watching multiple stocks or positions, price alerts can give you a heads up if it decides to rip higher without your eyes on it.
With levels set, if we get an exhaustive move into this prior resistance level, it could signal a short.
Replay
Let’s watch the quick replay:
VCNX vwap boulevard replay
With the help of bulls that morning, VCNX arrived right on time at our VWAP Boulevard level. 10am literally marked the top.
In the replay, at vwap boulevard you see a huge exchange of shares on the levell II. As noted in many of our other posts, this is a classic example of effort vs. result, and exhaustion.
@team3dstocks explaining bag holders
Long chasers were literally handing there shares over to short sellers who were absorbing the upward momentum. After one last push above vwap boulevard, the trend changed.
We get a red “kill candle” as bulls walk away and bears go looking for “blood,” as ADF would say.
The rest is history.
VCNX vwap boulevard rejection
Float Rotation
As a side note, VCNX had a float of around 15 million. By 10am that morning, it had already surpassed 100 million shares traded.
From the image above, it is quite clear that the majority of the shares traded occurred during the initial bull run to vwap boulevard. As ADF notes, the ideal “all day fader” will trail off considerably after 10am.
At that point, the momentum is lost, giving bears the confidence to ride it down.
Do yourself a favor: save your spot here and scroll up to compare the volume after 10am on the VCNX chart with the volume post 10am on the EYES chart above.
When To Cover
Returning for a moment to our discussion of Niv Goren and his analysis, we can find more data regarding the low of the day. This should help us with predicting a time to cover our short position.
According to Goren, a majority of these small cap / low float securities that fail according to plan will put in their ultimate lows in the last 30 minutes of the trading day.
Niv Goren’s data on small cap stock low of trading day correlated with time. Taken from inthemoneyadds.com
Niv’s article is worth a read as it outlines several key points that line up with ADF’s predictions, along with a few special circumstances that Goren backtested.
Generally speaking, this data makes sense of ADF’s strategy for holding these particular securities for the entire day as they are statistically more likely to make new lows by the end of the session.
VWAP Boulevard Short Example 2 – XSPA
For our last security, we’ll pick a premarket #vwapboulevard example. As ADF notes, stocks that reach this level and fail in the premarket are usually the most reliable all day faders.
XSPA did just that on March 8, 2021.
Per our premarket routine: once the security hits our premarket scanner, we pull up the daily chart and identify the prior highest volume days.
In this instance, using the January 28 intraday vwap level, we draw our line at $2.71
XSPA daily vwap boulevard levels
Once the lines are drawn, we head back to the premarket to plan our trade and see how it reacts to the levels.
With uncanny accuracy, the level proves worthy to short as bears reject the upward momentum and defend their boulevard. The stock never recovered and proceeded to sell off the entire day.
XSPA intraday #vwapboulevard rejection
$XSPA damn.. i wonder where the decisive price for today is..
The above examples are typical examples of what CAN happen on the short side. Not all low float stocks will fade all day. There may be times when stocks squeeze end of day.
Keep that in mind and trade at your own risk.
Short Recap
Identify gappers in the premarket (ideally 50%+)
Filter by float size (smaller caps)
Target stocks with enough liquidity (volume)
Zoom out on the daily or hourly to find high volume days
Draw horizontal lines on the highest volume day’s vwap
Go short if vwap boulevard becomes resistance and trend reverses
Look for heavy volume before 10am and volume to fade off afterward
Scanning for Candidates
How do you find good candidates for VWAP Boulevard?
This will depend a lot on your trading platform and tools. Most charting and trading platforms have built in scanners. So the look and feel of your scanners will vary greatly.
We’ll save an in depth look at scanning for another day, but essentially, what you are looking to do is narrow your results by a few things:
Market Cap less than 100 million
Low Float
Gap percentage over 50%
Outlier Volume (RVOL 100% or more ideally)
Your premarket %gain scanner is great way to narrow these results. Then once you have a few good candidates, narrow them down by float. After that work is done, it is up to you to set the VWAP Boulevard lines.
However, if you’re looking to practice this strategy in a simulator, we have done a lot of the work for you. Our scanner can scan for premarket gainers with data going back 3 years. You can also narrow by float size, premarket gap %, and volume.
Here’s a quick look:
Scanner for low floats in TradingSim
Once you’ve saved your scan. Simply head back to the chart view and you’ll find your list narrowed to the top performing candidates for that day.
Low Float scan results in TradingSim
All that’s left to do is set your vwap boulevard lines with the drawing tool, and you’re set!
Be sure to re-watch the video at the start of this tutorial for more guidance on how to do that.
Considerations
There is a lot to consider with this unique strategy. Hopefully this guide has united a lot of the data for you and how it all comes together. It is certainly a more advanced day trading strategy for those comfortable with the nature of small cap securities and the volatility associated with them.
That being said, there are few points worth considering when shorting this type of strategy:
Not all of these securities will be easy to borrow for shorting.
Access to borrowing shares may be limited to certain brokers.
Locating shares to short will have a cost associated.
Trading the premarket can be risky without the right tools.
The ability to use hotkeys for faster buy and sell orders may help.
Liquidity issues can create highly volatile price movements.
Lack of liquidity can create issues with large order fills.
Stock offerings and other news releases can happen anytime.
Stock halts happen frequently with volatile, low-float stocks.
Depending on the halt criteria and opening price, this could result in substantial losses.
How To Find More Information
@team3dstocks has a wealth of knowledge in his tweets. He is often asked questions, but recommends simply doing a search for his tweets using Twitter search tools. Rest assured you’ll likely find an answer this way.
For example, a simple search of #vwapboulevard or #beartipoftheday will turn up a myriad of tweets on the subject. On that token, he is usually good about tagging his tweets for the very purpose of finding specific information — even for specific ticker symbols.
Here is an example of results for a quick search using #vwapboulevard:
AllDayFaders search results for #vwapboulevard
Regardless of all the information, it takes practice and time to become acquainted with the strategy and nuances of trading it with real money.
How To Practice #vwapboulevard
As always, we are big proponents of putting strategies to work in a realistic environment without the risk. Once you have a solid dataset of successful simulation trades, you can try your hand with real money.
Here’s to good fills. And remember, look both ways when crossing the #vwapboulevard!
If you are wondering what the Volume Weighted Average Price (VWAP) is or how to use the VWAP indicator, then wait no more. We’ve created this ultimate guide to help you understand the ins and outs of VWAP, and how to trade with it.
The material is organized into 11 chapters, so be sure to take your time as you move through it. Toward the end, we will also explore the seven reasons day traders love using the VWAP indicator and why the indicator is a key component of many trading strategies. [1]
Learn How to Day Trade with the VWAP – Video
Before we dive into the reasons day traders love the volume weighted average price (VWAP), we’ve put together a short video to help you understand this indicator.
This video is a great primer before for the advanced techniques and strategies that we will cover later.
Chapter 1: VWAP Overview
VWAP identifies the true average price of a stock by factoring the volume of transactions at a specific price point and not based on the closing price. For this reason it is a great tool for understanding the current and future trend of a security, and the weight of where most traders are priced in.
Finding the average price of a security based solely on the closing value often provides an inaccurate picture of a stock’s health. This doesn’t take into consideration multiple time-frames and fluctuations in price and volume.
Did the stock close at a high with low volume? Did the stock move to a new low on light volume?
These are all critical questions you would want to be answered as a day trader before pulling the trigger on a trade.
This is where VWAP comes into play.
VWAP can add more value than your standard 10, 50, or 200 moving average indicators because VWAP reacts to price movements based on the volume during a given period.
VWAP for Day or Swing Traders
While we are highlighting VWAP for day traders, what we will discuss in this article is also applicable for swing traders and those of you that love daily charts.
So, if you do not partake in the world of day trading, no worries, you will still find valuable nuggets of information in this post.
Now that your expectations are set, let’s first walk through a few key concepts when using the indicator.
Most importantly, we want to make sure we have an understanding of where to place entries, stops, and targets using VWAP.
Chapter 2: VWAP Setups
After studying the VWAP on thousands of charts, we have identified two basic setups: pullbacks and breakouts.
By far, the VWAP pullback is the most popular setup for day traders hoping to get the best price before a stock continues higher.
Remember, day traders have only minutes to a few hours for a trade to work out. To that end, the closest entry at a support level can mean the difference between success or failure in a trade.
On the other hand, the VWAP breakout setup is not what you may be thinking. Instead of looking for a breakout to new highs, what we look for is a break above the VWAP itself, ideally with strength.
Now, let’s dig into the entry points for these setups.
VWAP Pullback Entry
Entry Option 1 – Aggressive Traders
Aggressive VWAP Trade
The first option is for the more aggressive traders and would consist of watching the price action as it is approaching the VWAP.
For this, you wait for a break of the VWAP and then look at the tape action on the time and sales.
You will need to identify when the selling pressure is spiking. Usually the time and sales (the tape) is going crazy when this happens. It looks like a flashing Christmas lights, orders are going in so quickly.
If tape reading is new to you, understand that it is more art than science and will require you to practice.
The goal is to identify when the selling pressure is likely to subside and then enter the trade.
Unorthodox Entry
This approach will break most entry rules found on the web of simply buying on the test of the VWAP. The problem with this approach is you don’t know if the price will breach VWAP by 1% or 4%, or greater.
After all, VWAP is a popular indicator. Too often the most obvious becomes too obvious and requires a shake out.
As an example of this, if the VWAP were at $10 and you place your limit order at $10, what can happen next? At times, it will slice right through the indicator swiftly.
This technique of using the tape is not easy to illustrate. We recommend practicing this approach using Tradingsim with Level II access.
Assess how close you can come to calling the turning point based on order flow, before you try the setup with real money.
VWAP Breakout Entry
Entry Option 2 – Risk Averse Traders
Conservative VWAP Entry
VWAP breakout entries are a great option for newer traders and those who are new to the VWAP indicator. It requires less proficiency with tape reading.
Essentially, you wait for the stock to test the VWAP to the downside. Next, you will want to look for the stock to close above the VWAP.
You will then place your buy order above the high of the candle that closed above the VWAP.
While this is a simpler approach for trade entry, it may open you up to more risk as you will likely be a few percentage points off the low. However, your success rate may eliminate the risk involved.
You will need to determine where you are in your trading journey and your appetite for risk to assess which entry option works best for you.
It goes without saying that while we have covered long trades, these trading rules can apply for short trades as well. Just do the inverse.
Nevertheless, let’s move to the next step. Now that you are in the trade, where should you place your stop?
Aggressive Trade Stop
Aggressive Stop Price
If you take the aggressive approach for trade entry, you will want to place your stop at your daily max loss or a key level (i.e., morning gap).
Again, this can work, but be prepared for wild swings that can occur if you get things wrong.
Pullback Stop
Conservative Stop Order
The pullback stop may be simpler to identify; it is the most recent low point.
If the stock begins to roll over and breaks the VWAP along with the most recent low – the odds are you have a problem.
At this point, you will want to close the trade and protect your capital. Your initial thesis was likely wrong.
Chapter 3: VWAP Target
Setting targets can be exciting. Everyone loves making money in trading, right? With a profitable target area, this is where the fun begins.
Realistically, you have a few ways to determine your profit potential on each trade.
Selling at the Daily High
Sell at High of the Day
This is a popular approach for exiting a winning trade. After entering the trade, you look for the high of the day to close the position. You place your stop below the most recent low.
After years of trading, you may notice that after the morning breakouts that occur within the first 20-40 minutes of the market opening, the next round of breakouts often fails.
This is because seasoned traders are selling their long positions into strength. On the flip side, novice day traders are trying to buy these breakouts. This gives the seasoned traders the liquidity to unload their shares to the unsuspecting public.
As with any trade, it’s always a good idea to imagine who and where the strong hands are averaged in. Not to mention, who and where the bag-holders are averaged in.
VWAP helps with this.
Selling at a Fibonacci Extension Level
Fibonacci Extension + VWAP
This is for the more bullish investors that are looking for larger gains.
Fibonacci levels are based on the hypothesis that the stock will break the high of the day and run higher.
If the target is it, it can bring huge gains, often in the 4% to 10% realm for day trades. This, of course, means the odds of hitting this larger target is less likely. To that end, you’ll need to the right mindset to handle the low winning percentage that comes with this approach.
Selling Into Climactic Price Action
There are times when the price action of the stock shows no sign of weakness. As buyers continue to buy, buy, buy, and short sellers continue to cover, the price pushes higher.
Eventually, what you might see is a parabolic chart. Here is an example below:
Parabolic Chart
As you see the stock running to climactic highs on climactic volume, it is time to sell. Maintaining that amount of price increase in such a short amount of time is not likely.
Take your profits and let the stock consolidate for another entry later down the road.
Whichever methodology you use for taking profits, just remember to keep it simple. The market is the one place where really smart people often struggle.
Chapter 4: Psychology of the VWAP Trade
If you have been trading for some time, you know that indicators alone are mostly smoke and mirrors. Ultimately, your success will come down to your frame of mind and a winning attitude. [2]
On that token, let’s take a break from the technical side, and get more into the fuzzy area of “mindset.”
Everything you need to make money is between your two ears
Think about the psychological benefit of VWAP pullback trades for just a moment.
A pullback trade just makes sense when you look at it on paper, right?
Why?
If it’s a morning gap, you are not buying at the highs. You are actually lowering the distance from your entry to the gap below.
Why is this important? You are reducing your risk on the trade as opposed to just buying the breakout blindly.
This will allow you time to analyze the price action before you add to the trade. As you monitor your trade entry, you can “size up” as the stock find its footing near VWAP.
Things are all well and good if the stock acts well. But, let’s discuss what you will likely be thinking if a VWAP pullback does not go in your favor.
When Things Don’t Go Well
With such a good average price, you can make the decision to kill the trade if need be. Assuming the volume and price action dictates more serious trouble on the horizon.
The important thing you will be faced with is when to exit the position. If the stock shoots straight up, it will be tough to find a pivot point to risk against. That is, without opening yourself up to a significant stop loss.
However, if the stock does have a close pivot point, you may be in luck. Nonetheless, you’ll need to watch for the price to close below the VWAP, or reverse and hold its ground.
What should you do in that situation?
These are the type of answers you need to have completely fleshed out in your trading plan before you even think of entering the trade.
It is the perfect reason to practice in a simulator as well. This way, you’ll know a multitude of scenarios before you make a decision.
VWAP, nor any other indicator will address the internal questions/conflicts you will be facing.
These are things that you need to manage if you want to have any success in the markets. And that success will come through exposure and experience.
When things go just right
The opposite side to this scenario is when you get it just right.
The stock pulls back to VWAP and you nail the entry. The stock runs back to the previous high and then breaks that high.
Talk about a feeling of mastery; it’s all profits and excitement.
In this instance, the trade goes in your favor. Depending on the volatility of the stock; you will find yourself up 2% to 3% without even blinking.
The money will literally fall into your account.
Why have we laid out these two psychological scenarios?
So that you get a feel for what it means to be in a losing and winning VWAP trade.
Simply knowing when you are in a winner or a loser and how quickly it takes you to come to that conclusion can be the deciding factor between an up-sloping equity curve and one that runs into the ground.
Chapter 5: Real-Life Trading Examples
Now that you have a handle on the basics and psychology behind the setup, let’s dig into a number of real-life trading examples.
Example 1 – VWAP Pullback Trade
In this trade example, we will review a historical example of the Financial Sector ETF (XLF).
If you were long the banking sector when you woke up on November 9th, 2017, you would have been pretty happy with the price action.
That morning XLF had a bullish gap. However, right off the open there was a very dramatic pullback.
VWAP Pullback Trade
Notice the huge red candle on the open as it gave back the gains from the premarket. The chart doesn’t show the premarket, but you see the $0.60 gap.
As a trader, could you anticipate whether or not XLF was going to crash back through the VWAP on the second crossing?
Remember, trading is about probabilities. Often we don’t know what will happen after the open.
As you can see, XLF experiences a slight rally, only to rollover again and retest the VWAP. Should you have bought XLF on this second test?
Porosity – Flexibility
Notice how the XLF doesn’t hold the VWAP and actually trades below the indicator.
This is an important example to highlight that stocks don’t always honor VWAP as if it is some impenetrable wall.
If you read other posts on the web about VWAP, it may give you the impression that if a stock closes below VWAP you need to run for the hills.
This is the furthest thing from the truth.
There are automated systems that push prices below these obvious levels (i.e. VWAP) to trip retail trader’s stops. They do this in order to pick up shares below market value.
Not to mention, many traders do not have the indicator on their chart.
Therefore, what is so apparent to you may not even be on another trader’s radar.
Back to the trade.
VWAP Pullback Trade
The last thing that made this trade difficult is the volume action on the VWAP breakout. Compared to most breakouts, it wasn’t screaming “buy me.”
However, if you look a little deeper into the technicals, you can see XLF made a higher low. The volume, albeit lighter than the open, is still trending higher. This is noted on the chart.
Once XLF was able to get back above VWAP with steadily increasing volume, it never looked back.
Remember as a trader, we are not here to guess how the news will affect prices. Our job is to trade the price action in front of us.
Example 2 – VWAP Breakout Trade
We’ll now move on to VWAP breakout trades and the volume associated with these moves.
Volume is a lot like a lens you can apply to the market. It helps make sense of all the chaos.
VWAP Trade
Notice this trade of Buckeye Partners, LLP. Clearly you can see the stock stayed below the VWAP indicator for some period of time.
BPL was eventually able to climb above the indicator, and stalled.
At this point, you could jump into the trade. After all, the stock has been able to reclaim VWAP. Just be aware that price movement can trend sideways for a considerable amount of time.
Remember, it’s not just about placing trades; the goal is to place trades that will make the best use of your time and money.
The Impact of Volume
The key thing you want to see is a price increase with significant volume.
Will you get the lowest price for a long entry — probably not.
However, if you wait, you will receive confirmation that the stock is likely to run in your desired direction. The volume is your tell-all that demand is behind the move.
In this specific trading example, wait for the price to move above the high volume bar bouncing off VWAP. This is a sign to you that the odds are in your favor for a sustainable move higher.
Chapter 6: VWAP and Confluence
So, you could be asking yourself. “What do peanut butter and jelly have to do with trading?”
Everything.
In trading, one signal is okay. But if multiple indicators from varying methodologies are saying the same thing, then you have something special.
Confluence is essentially an opportunity where another technical support factor is at the same price as VWAP.
For example, a Fibonacci level or a major trend line coming into play at the same time.
Confluence
This confluence can give you more confidence to pull the trigger. The more entry signals confirming, the better.
This brings us to another key point regarding the VWAP indicator.
There are many great traders that use the VWAP exclusively. However, these traders have been using the VWAP indicator for an extended period of time.
When starting out with the VWAP, you will not want to use the indicator blindly.
While we’re not suggesting you throw 10 indicators on your chart for confirmation, you will need to use some other validation tool to ensure you are seeing the market clearly.
Trading on price action alone takes many years of experience.
Chapter 7: Finding VWAP Trades
Timing is everything in the market, and VWAP trades are no different.
While stocks are always trading above, below, or at the VWAP, you really want to enter trades when stocks are making a pivotal decision off the level.
To do this, you need to have the ability to scan for these setups in real-time.
Likewise, you’ll want to have more than one criterion for filtering your scans. This helps dwindle down the huge universe of stocks to a much more manageable list of 10 or less.
However, if you purely trade with VWAP, you’ll need a way to quickly see what stocks are in play.
To do this, you will need a real-time scanner that can display the VWAP value next to the last price. You then cross-reference the VWAP value with the current price to identify volatile stocks that are close to the indicator.
VWAP Scanner
While not all examples are highlighted, we have circled a few examples for you. Notice the “Last” and the “VWAP” columns and how closely the values align. This is what you’re looking for.
Another option if you have the ability to develop a custom scan is to take the difference of the VWAP and the current price and display an alert when that value is close to zero.
Essentially, this is the numerical representation that the price and VWAP are overlapping.
Chapter 8: 7 Reasons Day Traders Love the VWAP
Hopefully the information thus far has increased your level of understanding when it comes to the VWAP indicator.
Now, we can shift into what first caught your attention – the 7 reasons day traders love the VWAP!
7 Reasons Day Traders Love the VWAP
Reason # 1: VWAP Calculation Factors in Volume
For the record, the VWAP formula is:
∑ Number of Shares Purchased x Price of the Shares ÷ Total Shares Bought During the Period
By multiplying the number of shares by price, then dividing it by the total number of shares, you can easily find out the volume weighted average price of the stock.
Since the VWAP takes volume into consideration, you can rely on this more than the simple arithmetic mean of the transaction prices in a period.
To learn more about the VWAP formula, check out this article from Wikipedia. [4]
Theoretically, a single person can purchase 200,000 shares in one transaction at a single price point, but during that same time period, another 200 people can make 200 different transactions at different prices that do not add up to 100,000 shares.
In that situation, if you calculate the average price, it could mislead as it would disregard volume.
Reason 2 #: VWAP Can Enable Day Traders to Buy Low and Sell High
If your technical VWAP trading strategy generates a buy signal, you probably execute the order and leave the outcome to chance.
However, professional day traders do not place an order as soon as their system generates a trade signal. Instead, they wait patiently for a more favorable price before pulling the trigger.
Price of AAPL Compared to Its 5-Minute VWAP
If you find the stock price is trading below the VWAP indicator and you buy the stock at market price, you are not paying more than the average price of the stock for that given period.
With VWAP trading, know you’re always getting a lower price than average.
By knowing the volume weighted average price of the shares, you can easily make an informed decision about whether you are paying more or less for the stock compared to other day traders.
Reason # 3: A VWAP Cross Can Signal a Change in Market Bias
Buying low and selling high can be a great strategy. However, as a momentum trader, you’re looking to buy when the price goes up and sell when the price goes down.
AAPL Crossing Above VWAP
A VWAP trading strategy called the VWAP cross can help you locate and trade momentum in the market.
Since the VWAP indicator resembles an equilibrium price in the market, when the price crosses above the VWAP line, you can interpret this as a signal that the momentum is going up and traders are willing to pay more money to acquire shares.
Conversely, when the price crosses below the line, consider this a signal that the momentum is bearish and act accordingly.
Reason # 4: VWAP Can Act as Dynamic Support and Resistance
BONT Price Respecting VWAP Resistance
Day traders love the VWAP indicator because more often than not, the price finds support and resistance around this level.
Some might argue that this can be a self-fulfilling prophecy. Other traders and algorithms are buying and selling around the VWAP line, after all.
Nonetheless, if you combine the VWAP with simple price action, a VWAP trading strategy can help you find dynamic support and resistance levels in the market.
The likelihood of a VWAP line becoming a dynamic support and resistance zone becomes higher when the market is trending.
Reason # 5: VWAP Can Help You Confirm Counter Trend Trading Opportunities
VWAP Confirms the Oversold Signal Generated By the RSI Indicator
Ever wonder if a stock is overbought or oversold and if it’s time to take a counter trend trade?
Just looking at the RSI or Stochastics and guessing can often throw false signals. You need concrete evidence of whether there is a strong trend or a chance the market will turn back. Adding the VWAP indicator on your chart can make your life much easier, in this regard.
To that end, professional day traders have a rule of thumb when using the VWAP.
If the line is flatlining, but the price has gone up or down impulsively, the price will likely return to VWAP.
However, if the line is starting to gradually move up or down in a new trend, it is probably not a good idea or good time to take a counter-trend position.
Reason # 6: VWAP Can Help You Reduce Market Impact
Most day traders do not affect the market much because we often trade our personal funds at the retail level.
However, hedge funds and pension funds are much bigger. Their decision to buy a stock can drive up the price considerably.
Just imagine for a second you are day trading and want to buy 5,000 shares of Apple (AAPL).
AAPL is a fairly popular stock and traders rarely face any liquidity problems when trading it. Hence, you will quickly find a seller willing to sell his 5,000 AAPL shares at your bid price.
However, if you want to buy 1 million AAPL shares it will take more time. Your broker will likely have to fill a good portion of your order at a price higher than the current market price.
If that’s you, congratulations, you have just bid the price up and impacted the market!
Placing a large market order can be counterproductive. You will end up paying a higher price than you originally intended.
Institutional Buying
For that reason, when funds want to buy large quantities of a stock, they typically spread their orders throughout the day and use limit orders.
If they find the stock price is trading below VWAP, they are able to pay a lower price compared to the average price, right? This way, VWAP acts as a guide and helps them reduce market impact while dividing up large orders.
You may think this example only applies to big traders. However, in the world of low float stocks, even small orders can make an impact on price movement.
Be sure you know what you’re trading.
Reason # 7: VWAP Can Help Beat High-Frequency Algorithms
They are watching you.
When we say they, we mean the high-frequency trading algorithms.
Have you ever wondered why the liquidity levels in the stock market have gone up over the last few years?
The high-frequency algorithms can act as little angels when liquidity is low. But these angels can turn into devils as they attempt to bid up the price of a stock by placing fake orders only to cancel them right away.
If you are emotionally following the tape, you may start executing market orders because you are worried the price will run away from you.
We call this Fear of Missing Out (FOMO). Don’t fall prey to it.
This is where the VWAP can come into play. Instead of focusing on the level 2, you can place limit orders at the VWAP level to slowly accumulate your shares without chasing these phantom orders.
Chapter 9: Bonus Content: Low Volatility Stocks and VWAP
Here at TradingSim, we like to scan for highly volatile stocks and then apply the VWAP to the chart.
This approach put us in the best position to turn a big profit. But one thing we noticed is that highly volatile stocks have less respect for indicators – including VWAP.
Let’s look at a few of these highly volatile stocks and their action around VWAP lines.
Example #1: RIOT Blockchain
Hard Break of VWAP
At first glance, you are likely thinking what’s the big deal with RIOT here?RIOT blockchain did exactly what we would expect stocks to do when interacting with the VWAP.
Or did it?
In the morning the stock broke out to new highs and then pulled back to the VWAP. This pullback to VWAP would have been a good opportunity to get long on the stock for a rebound trade.
However, this lack of a bounce produced a violent selloff from $7.70 to $7.20. This represented a sell-off of almost 7% in 40 minutes.
Do you think you would have what it takes to sit through a 7% beat down?
Only you can answer that question.
Violent price swings, even when allocating small amounts of cash, can be very difficult to sit through.
Example #2: MBI
Failed at Test Level
In the next example, MBI had an explosive move up through the VWAP indicator. The stock then came right back down to earth in a matter of 4 candlesticks.
4 candlesticks were literally a 10% down move in 20 minutes. You can see MBI did not recover to the VWAP level even as time pushed beyond 12 noon.
Goldman Sachs mentioned in an article that with higher volatility in the S&P 500, traders have “drawn back from using VWAP algorithms.” [5]
This is not to say the indicator doesn’t work, it’s just that the level of volatility can decrease the accuracy of the indicator.
They are plenty of day traders who trade volatility. You’ll just have to ask yourself it this fits your personality.
Chapter 10: VWAP and Futures Contracts
Building upon the concept of securities with more predictable volatility, let’s turn our focus to how VWAP performs with the S&P E-mini futures contract.
For those of you that trade the S&P E-mini, you know all too well the contract moves in a familiar pattern.
S&P VWAP Retest
The dramatic Covid-19 sell-off in February of 2020 felt extreme after the low volatility the S&P had experienced over the prior 5 months.
Yet, after the selloff began, for VWAP traders it was clear the 2,570 level would provide significant volume and price support for the S&P 500 E-mini contract. This is the blue line on the chart above.
As you can see, VWAP does not perform magic. However, it clearly did a good job of identifying where the bulls were likely to regain control.
S&P VWAP Retest #2
The S&P rallied more than 10% from the lows.
What do you think happened when the S&P 500 E-mini took another breather?
That’s right, the futures contract ran right back down to the VWAP for support. The VWAP provided support over the last few tests.
Keep in mind, though, that more tests can weaken the resolve of the bulls.
I this case, the S&P went lower.
Chapter 11: VWAP Futures Case Study
So far we have covered trading strategies and how the VWAP can provide trade setups.
Now, let’s discuss a case study to highlight how price interacts with the VWAP to help formulate a trading strategy.
Many traders will have their own hypothesis in place and subject that hypotheses on the market.
Our approach is to observe the market’s behavior and apply rules that can construct an objective system for trading.
Methodology
Analyze the S&P 500 E-mini contract for this case study. We did this because the E-mini has high volume, tight spreads and consistent price movement. This way we would have an increased likelihood of a repeatable pattern in the contract.
Use the 5-minute time frame to increase the number of trade signals
Observe price action from 1/1/2018 – 1/31/2018
Track price movement once spread between VWAP and S&P 500 E-mini reached .4% or greater.
Note where counter price move ended to calculate potential gains
Here is what we found. Take a look at the below table of the observations.
Data
Let’s unpack the data in this table further.
Date – captures the time when the spread between the Price and VWAP was greater than .4%
E-mini value – either the low or high point reached once the spread between price and VWAP hits .4%
VWAP – the value of the VWAP when the low or high is registered after the spread between price and VWAP hits .4%
Spread – absolute value of the difference between VWAP and Price
Percentage Spread – percentage value of the difference between the VWAP and Price
Peak/Low – peak high point or low value of swing low
%Gain – represents the move from the high or low pivot point
The point of the study is to illustrate that as the S&P pulls away from the VWAP, at some point it has a sharp correction back to the indicator.
Clearly, VWAP can provide a a significant impact on the movement of a stock. It is up to you to find ways of trading around it consistently.
When trading this strategy remember to account for slippage as you will not get the highs and lows for entry/exit.
Other VWAP Strategies
For those inclined to trade small cap and low float stocks, we’ve put together an in depth guide to a strategy caled VWAP Boulevard.
Essentially, it is a lot like a pivot point, or area of long term resistance. What happens during the trading day at these levels can determine huge gains on the long or short side depending on the context.
To that point, VWAP Boulevard is somewhat similar to another strategy popularized by Brian Shannon, CMT. It’s called Anchored VWAP.
This strategy “anchors” the volume weighted average price on daily charts to special “events” days. Those events could be lows on the chart, high volume days, earnings, news releases, etc.
The theory is that the volume anchored to these particular days will either provide support or resistance in the future.
As Shannon describes it:
In a trending market, the classic horizontal support and resistance levels are not always obvious. If we want to measure price memory from an “event” the Anchored Volume Weighted Average Price tool is the most effective means to accomplish this task.
Brian Shannon, CMT
Conclusion
Once you apply the VWAP to your day trading, you will soon realize that it is like any other indicator. There are some stocks and markets where it will nail entries just right and others it will appear worthless.
If you use the VWAP indicator in combination with price action or any other technical trading strategy, it can simplify your decision-making process to a certain extent.
For example, when trading large quantities of shares, using the VWAP can ensure you are paying a fair price.
Just remember, the VWAP will not cook your dinner and walk your dog. You need to make sound trading decisions with what the market is showing you at any given moment.
If you have questions about the VWAP or want to discuss your experiences, please share in the comments section below.
![VWAP Boulevard Indicator: The Ultimate Guide [#vwapboulevard]](https://app.tradingsim.com/wp-content/uploads/2021/06/vwapboulevard1-2.png)
