OrderFlow Labs

Trading with vWap

Trading with vWap

Discussion on vWAP with Job

In this edition of the OFL Blog Series we are going to be discussing the VWAP. VWAP is the Volume Weighted Average Price. VWAP is calculated as the sum of the price times volume, divided by the sum of the volume. VWAP is utilized as a benchmark for many traders throughout the trading day, in order to provide a fair value for whatever security they are actually trading.

VWAP shows up as the similar view of a moving average; however, it is actually taking the consideration the actual volume that has been transacted. As such, the VWAP is used by traders as an indication of the true price of security over time, in order to gauge fair value and responsive nature from it.

We are going to take a look at a few different VWAPs. The VWAPs we are going to be looking at is full session starting from Globex, leading all the way through RTH, which is the Regular Trading Hours. Second, we’re also going to look at the rating regular trading hours, the RTH VWAP, alone. Lastly, the anchored VWAP, which can be positioned from a swing high or swing low.

Here you can see a  five minute candlestick chart. And we’re going to dive into the VWAP itself. A full session VWAP, starts in Globex, right here. Then what it starts to do is gauge the volume versus price, and show a fair price for the actual security that you’re looking at. So as this occurs, you can see how price dips far away from it and comes back to it. And every time it comes back to it, there’s some sort of response of activity throughout that whole Globex session. As we flip into RTH, you can see that another one starts here. And this is an RTH only VWAP. And so that gives me a quicker timeframe gauge of that volume weighted average price. And you can see how after the open, first hour and a half trade, it allows me to judge where the response activity is going to be.

So how do we utilize this? Well, if price is coming up from below it, if it’s respecting that, then we want to be cognizant of that and going with that trade, if it’s unable to build any activity above it. As this reclaims and recaptures the VWAP, up here, like into RTH, we need to be aware of that, because what you typically get is some sort of pullback and then go with that. And so throwing the RTH VWAP on that, allows you to see that a little bit quicker. And so you can see that in this zone here. The RTH VWAP, should be responsive through the entire RTH session, as well the full session vWAP.  We don’t blindly dive into these; you want to gauge your tape. If the price is coming down into this from above, you want to see that buy on the tape, and that’s going to give you that confidence to enter that trade in order to move away again, from the VWAP itself.

There’s one more type that’s called an Anchored VWAP.Anchored VWAP is utilized from swing highs and swing lows. What I like to do is you can gauge it off something like a swing high like that, swing low like that. But coming into RTH, what is the swing low? That would be this right here. And so we’ll put that on. In here, in red, you can see the anchored VWAP. Now this is still on the five-minute chart. You can see how this played roll from this here and showed you that initial crossing built above to allow for early initial entry from that swing low.

What I want to do is take a look at longer timeframe to gauge something that you can leave on your charts for a while, a swing high and low from like a 30 minute chart. In this example here, you can see that I brought the anchored VWAP off this primary low from the 30 Minute candlestick chart. And so, from this, it’s going to continue to build that line and that line is going to be treated in the same way in an intraday fashion, you treat a full session or an RTH session VWAP itself. And as we approach that, we get that response to that activity. Multiple timeframes. So this is something on a swing higher swing low, that if we were to breach that, then that would be important to us.

So what do you mean breach that? Well, if I were to go ahead and simply place this on this high, then you can see how upon breaching it here, we came back to retest and get that response activity back up. Again, multiple times, actually.  You want to be looking for your swing highs and swing the obvious highs and lows that you have on whatever time frame you’re looking at, throwing that anchored VWAP on. And if this begins to sell off here and you throw an anchored VWAP here, that’s fine. You want to be gauging, then you’d be playing downside against this until it doesn’t work. And so, this is another way to look at that volume weighted average price and keep you on the right side of your trade.