Tuesday, June 02, 2009

Volume-Weighted Average Price (VWAP) and Trading Range Days

One of the defining features of a range day is that it will typically oscillate around a fulcrum price; quite often, that price is the average price at which the market trades during the day. The volume-weighted average price (VWAP) takes each one-minute high-low-close average price and weights that price by the volume traded that minute. We then create a stationary moving average that starts with the first minute of the trading day and averages in each succeeding minute's volume-weighted price.

Note how the narrow premarket trade helped us identify a candidate range day before trade even began. Once we could not sustain an early move above Monday's high price, we began the oscillation around VWAP. The best trades on such range days involve fading moves that take us away from the day's average price. VWAP itself can be the first target price for such a trade; often there will be other prices, such as the prior day's pivot, which made a nice idea for one of the intraday tweets.

Do you trade in the market direction and pursue strength or weakness, or do you fade market direction? Making the call as to whether we're in a trending or non-trending environment is half the battle for the intraday trader.