Tuesday, October 27, 2009

Understanding Market Movement With VWAP

As noted in my recent post, there are many price levels that I utilize as reference points for intraday trading. One of the most valuable is the volume-weighted average price (VWAP). This can be calculated in Market Delta as an indicator; I typically chart it on my Market Delta screen as a red line that begins with the start of the new day's futures session.

The overnight session is thus included in the calculations, but tends to lose impact on the VWAP as time moves on, since volume is so much higher during regular trading hours.

The slope of VWAP gives a sense of intraday trend.

In a range market, we'll tend to trade on both sides of VWAP.

In a trending market, we'll stay dominantly to one side of VWAP.

When early moves fail to take out resistance or support, a return to VWAP often makes a high probability trade.

A valid breakout move during the day can often be seen as a rejection of VWAP, such that VWAP becomes a moving stop for the resulting trend trade.

If a number of sectors cannot sustain moves above or below VWAP even as the broad market trades above or below its VWAP, it's often an indication that we will not sustain a trending move.

Tracking moves above and below VWAP for individual stocks with programs such as Trade Ideas can give useful clues as to broader market movement, as certain sectors tend to take the role of market leaders for the session. (Financial stocks were an example today).
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5 comments:

E said...

Since vwap is a bogey that is visible to many traders (especially the lazy ones) it has become more important to me.

I like to see the reaction near it as a magnet that repels or attracts price and observe how strong the response.

Matt Fahmie said...

I like the how you phrased a legit breakout as a rejection of VWAP. That's a great way to think of it. Also, using the VWAP as a trailing stop on confirmed breakouts sounds like a great idea, as rotation back through it would most likely signal change from a vertical market to one that will now become more horizontal. Generally on good breakouts the VWAP will lag significantly behind the vertical extension; pullbacks will occur to the 1st standard deviation. When the VWAP finally catches up with price, I view it as the slower value area trend catching up with the volatile price trend. It now becomes an area both buyers and sellers agree upon as fair value and can conduct business with each other within this "value area".

-Matt

JimRI said...

Dr. Brett,

FYI, For those who use esignal, there is also a function available for it that plots the VWAP (without the SD bands). It can be found in their knowledgebase. I have written an extension to that which calculates the accumulated TICK with adjustment as well.

angrynice said...

Does anyone have a sense of how High Frequency Trading affects analysis like this that involves volume ?

Investwise said...

I use the pivot formulae that is seen here:

http://www.investopedia.com/articles/technical/04/041404.asp

But these numbers differ from your numbers. You don't need to share if it is proprietary, but let me know why? thanks

Sri