Using VWAP Like a Pro
How to improve your edge with VWAP
VWAP
What is it and why should you care
VWAP is short for Volume Weighted Average Price.
It is a reliable tool that can give you an edge in the market.
When used in futures trading, VWAP is particularly useful as it reflects ALL transaction volumes - which is frequently NOT the case with forex and cfd brokers who only have their own client volumes.
If used correctly, VWAP can be an effective way to set mean reversion targets and avoid middle trading on a ranging day. It can also help with momentum trades that start slowly.
It is a reliable tool that can give you an edge in the market.
When used in futures trading, VWAP is particularly useful as it reflects ALL transaction volumes - which is frequently NOT the case with forex and cfd brokers who only have their own client volumes.
If used correctly, VWAP can be an effective way to set mean reversion targets and avoid middle trading on a ranging day. It can also help with momentum trades that start slowly.
Useful - but not magic
Bear in mind that, while VWAP is an excellent institutional tool to add to your trading toolkit, it's not a magic solution.
You'll also need to use other data, such as Market Profile, Volume analysis and Supply/Demand order blocks, to stay flexible and skilled in navigating a range of market conditions.
At Market Stalkers, we like to use VWAP in conjunction with different high-probability orientation points at very specific times of day and highest volume bars.
You'll also need to use other data, such as Market Profile, Volume analysis and Supply/Demand order blocks, to stay flexible and skilled in navigating a range of market conditions.
At Market Stalkers, we like to use VWAP in conjunction with different high-probability orientation points at very specific times of day and highest volume bars.
VWAP as a Mean Reversion Target
One popular strategy is to use a bounce from a 2nd Standard Deviation and then to use VWAP as a target.
But the problem will arise on a day when you have an abnormal volatility day and the price just keeps shooting in one direction.
So while using VWAP as a target is great, if VWAP is miles away at the time when you're attempting to jump into a potential mean reversion, you may find that the price never returns to VWAP that day.
Having another way to determine if you're looking at a normal or abnormal day perhaps via Average Ranges is a good way to stay out of trouble.
But on a normal day we expect lots of ebbs and flows. And this is when VWAP as a target can be incredibly useful.
But the problem will arise on a day when you have an abnormal volatility day and the price just keeps shooting in one direction.
So while using VWAP as a target is great, if VWAP is miles away at the time when you're attempting to jump into a potential mean reversion, you may find that the price never returns to VWAP that day.
Having another way to determine if you're looking at a normal or abnormal day perhaps via Average Ranges is a good way to stay out of trouble.
But on a normal day we expect lots of ebbs and flows. And this is when VWAP as a target can be incredibly useful.
VWAP on a ranging day
This is actually my favourite way to utilise VWAP.
Ranging days are difficult to trade and usually take the most time to master. This is because ranging days require accuracy and timing. You also have to stay patient. Trading a ranging day doesn't mean doing 15 trades bouncing from highs and lows like a ping-pong.
Usually you'll be able to find 2-3 reasonable opportunities with a reduced target.
Having VWAP on your chart in this case means using it to gauge where the middle of the middle is located. And then to aim to keep your entries AWAY from that level
. You may still use it as a target if the ranging day has a nice span, but usually ranging days are not the biggest. Still, pairing VWAP with a TPO profile can be used to stay away from VWAP and from the thickest parts of the TPO profile, giving you another dimension of data that can help you find your edge.
Ranging days are difficult to trade and usually take the most time to master. This is because ranging days require accuracy and timing. You also have to stay patient. Trading a ranging day doesn't mean doing 15 trades bouncing from highs and lows like a ping-pong.
Usually you'll be able to find 2-3 reasonable opportunities with a reduced target.
Having VWAP on your chart in this case means using it to gauge where the middle of the middle is located. And then to aim to keep your entries AWAY from that level
. You may still use it as a target if the ranging day has a nice span, but usually ranging days are not the biggest. Still, pairing VWAP with a TPO profile can be used to stay away from VWAP and from the thickest parts of the TPO profile, giving you another dimension of data that can help you find your edge.
Volume anchored VWAP as orientation
Anchoring VWAP to the highest volume bar as the session progresses is a very good systematic way of tracking the progress of price action for exits or entries.
Method: find the highest volume bar on a low timeframe such as a 2 minute chart.
Anchor the vwap to that bar. Trade rejections or continuations from the anchored high vol bar as if it's any other level.
This approach works as a timing tool as well as OODA tool (observe, orient, decide, act). You still need to read price action and ideally tape around the anchored vwap but it provides an evolved way to track price action development on any given day.
Method: find the highest volume bar on a low timeframe such as a 2 minute chart.
Anchor the vwap to that bar. Trade rejections or continuations from the anchored high vol bar as if it's any other level.
This approach works as a timing tool as well as OODA tool (observe, orient, decide, act). You still need to read price action and ideally tape around the anchored vwap but it provides an evolved way to track price action development on any given day.
Settlement Price Relevance and VWAP as a Directional Indicator
A lot of the time in the futures markets settlement price from yesterday's trading can act as a magnet.
In this case, you might be able to use VWAP as a directional indicator with a view that when the price crosses (and closes) over VWAP, this may signal an early attempt at moving back to settlement.
A similar use can be observed whenever the price opens outside of yesterday's distribution curve (aka the value area - market profile concept). You can then use VWAP crossover as an early entry to monitor for a potential sustained auction break back to settlement.
Overall, as you can see, VWAP can be a versatile weapon in your toolbox to bump up your trading edge.
In this case, you might be able to use VWAP as a directional indicator with a view that when the price crosses (and closes) over VWAP, this may signal an early attempt at moving back to settlement.
A similar use can be observed whenever the price opens outside of yesterday's distribution curve (aka the value area - market profile concept). You can then use VWAP crossover as an early entry to monitor for a potential sustained auction break back to settlement.
Overall, as you can see, VWAP can be a versatile weapon in your toolbox to bump up your trading edge.
Blahtech VWAP for MT5 (and MT4)
The only VWAP indicator that has the potential for customisable settlement prices and multiple calculations is Blahtech VWAP for Metatrader platforms.
Here are some of the features of Blahtech VWAP:Configurable VWAP Line
Sessions, intervals, anchored or continuous
Previous day settlement line
Standard Deviation bands
Alerts at bar close or real time
Automatic Broker or Tick volumes
Significantly reduced CPU usage
Available from MQL5.com App Store
Here are some of the features of Blahtech VWAP:
Available from MQL5.com App Store
