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).