Tuesday, February 03, 2009

Using VWAP to Determine the Structure of the Trading Day

A review of an earlier post is in order: a market's volume-weighted average price (VWAP) reflects the average price of transactions through the trading day. Knowing where we are trading during the day relative to that day's VWAP is very helpful in identifying the kind of day that we're in.

Above is a chart of yesterday's S&P 500 e-mini index (blue line) vs. its VWAP (pink line). We opened below the market's previous day's close and oscillated around VWAP in the early minutes of trade, moving both above and below the market's opening price. Advance-decline breadth was negative, and we saw a moderate negative bias to the NYSE TICK.

Had this been a strong downtrending day, we would have seen several things:

1) Price moving away (lower) from its opening level;

2) A downtrending VWAP line, as new transactions are occurring at lower price levels and lower prices are attracting further selling volume;

3) Price stays below the VWAP line, as recent transactions are occurring at lower price levels than earlier ones and the lower prices are attracting selling volume.

The fact that we were oscillating around the market opening price for much of the first half-hour of trade was an early indication that this was not shaping up as a strong downtrending day.

Indeed, with the 9 AM CT data, we saw an upside break above the opening range on a positive shift in NYSE TICK. As a result, we traded above VWAP and VWAP displayed an upward slope. If this were going to be a solid uptrend day, we should have seen a reverse of the three conditions above: price moving away from its opening level through the day to the upside; an uptrending VWAP line; and price remaining above VWAP.

By around 9:30 AM CT, however, my short-term moving average of TICK turned below zero. Breadth was still negative in the market, not something we'd expect in a market that had shifted from a down open to a solid uptrend. The market pulled back toward its VWAP line before again marching higher into midday on resumed positive TICK. Breadth remained negative, however, and we again pulled back toward VWAP on negative TICK, before again moving higher.

There was a bullish directional bias to the day from open to close, as we can see from the generally upsloping VWAP line. The entire day, however, traded below the prior day's pivot (average price) level on negative breadth. Moreover, the day could not sustain trade above its VWAP line, oscillating above and below. What that tells us is that we had a relatively weak rally in a downtrending market.

As the earlier VWAP post indicated, VWAP can be thought of as the market's evolving estimate of value. In a weak trending or non-trending market, we will tend to move away from VWAP to probe trader/investor interest. If that interest is lacking, we will tend to gravitate back toward that VWAP value level. In weak trending markets, you want to be fading moves away from VWAP.

Conversely, in a strong trending market, we will see strong or weak breadth becoming more extreme through the day. Price will stay above or below VWAP; there will be a positive or negative slope to a Cumulative TICK line (not oscillation of a TICK moving average above and below zero); and the VWAP line itself will sustain an upward or downward slope. Those are the markets where you want to ride moves higher or lower to R1, R2, R3/S1,S2,S3 price targets.

What is the character of the day you're trading? Where we trade relative to the market open and relative to the day's VWAP will provide important clues. At the very least, it will keep you from assuming trends in weak markets and keep you from fading trending ones.


maineman said...

Must one have special software to calculate this intraday? If so, which platform? Thanks. Maineman

GS751 said...

Where do I find VWAP? These type of posts are so informative?

Damien said...

Another great post ...Just to echo the other comments here im interested in learning more about VWAP calulations.

phillf said...

maineman,GS751 - Vwap is available as a custom indicator for NinjaTrader in their support forum, I downloaded it yesterday and it works a treat.
Brett, first of all thanks so much for all the
information you so generously provide.
Would you care to elaborate on how you measure Advance/Decline Breadth ? Thanks, Phill.f

DT said...

You can find VWAP on a lot of different charting/trading platforms. I use Realtick and it displays VWAP. ESignal does it as well. Bloomberg gives it. Basically call you data provider and if they give intraday price and volume data you should be able to get VWAP.

VWAP is really useful for trading levels as well as to help gauge the effectiveness of any algorithmic trading.

Recursive said...

Re: VWAP for eSignal... I have NEVER found VWAP for eSignal---there are a few home-made versions out there, but they don't work. As far as I know, it's only available for eSignal Advanced GET, which is $1500/mo. Anyone know where to get it for basic eSignal? Thanks.

Brett Steenbarger, Ph.D. said...

Hi Readers,

I calculate VWAP in Excel from raw data from my platform; e-Signal offers a volume weighted moving average in their moving average menu that is an approximation--


Brett Steenbarger, Ph.D. said...

Hi Phillf,

In e-Signal, $ADD is the symbol for the number of NYSE advancing stocks minus the number of decliners--


Brett Steenbarger, Ph.D. said...

Hi Recursive,

In the latest version of e-Signal, you can go to their menu of basic studies, select moving average, then select volume-weighted and you can get an approximation of VWAP.


Recursive said...

Brett--- thank you so much for replying to those questions on eSignal and VWAP ---appreciate it greatly. Very kind of you to take the time!


Damien said...

If I use VWMA as a substitute for VWAP, what time period must I choose for a one minute chart?


Brett Steenbarger, Ph.D. said...

Hi Damien,

Much of the choice of lookback period will depend upon your trading time frame. Once I create a 20 or 40 period MA, I can then just toggle from 1 to 3 to 5 min etc bars to see how the VWMA is evolving at various time periods.


davez said...

Brett, I recently installed eSignal's amvwap2.efs. It seems to work well and its value matches with VWAP values shown in charts posted in Twitter. Another file (amStudies.efsLib) must also be installed, but a search for amvwap2 in the eSignal forums clearly explains how/where to install this file. Hope that helps.

Brett Steenbarger, Ph.D. said...

Thanks, Dave, that is *very* helpful. I appreciate the heads up.


etoke said...

Dr. Brett, thanks to this post I have started looking into VWAP did some more research.

In this post, I have tried to extend the calculation to start from the last market turn. I think the result is quite interesting.

I use Amiboker for my research, which I find is an excellent resource.


Warm regards,

meques said...

hey peers,
if Brett dosnt mind, here is link to Excel document with VWAP calculating example based on another chart made in Excel and with VWAP from that post.

al said...

hi Brett

would the point of control on market profile be close to the same thing


Brett Steenbarger, Ph.D. said...

Hi Ca,

Often similar, but not always; POC can be affected by individual large trades at a price away from the day's average. That is good information, so I like to track both--


JasonG609 said...

VWAP is also available at Think or Swim.