I’m going to try to explain this as simply as I can but for the technical details of VWAP check out these free resources before going forward if you are unfamiliar https://goo.gl/oDTcXP & https://goo.gl/sxOFoW. It’s (VWAP) no holy grail and it’s never a sure thing, but it’s the only “indicator” I always have up on my intraday charts. When I first learned about it 2ish years ago I saw traders posting pictures nailing perfect bounces right off VWAP what seemed like every single time. I thought I found the recipe for success, but quickly realized how easy it is to look back in time and find perfect cases while in real time it wasn’t so simple. After taking some hefty losses trying to blindly do the same I took a step back and just left it on my charts without paying too close attention to it. It wasn’t until I started tracking which trades worked more often for me than others that I realized how I could use it on a daily basis.
For me, and remember lots of people use the same tools for completely different reason, VWAP quickly let’s me look at an intraday chart and see who is in control. If the current price is over VWAP then the average long who traded that stock that day is in the green and if below VWAP the average long is in the red (examples below). Well how is that useful? I am currently trading a breakout strategy and I was noticing that breakouts had a much higher probability of success when price was over VWAP. Let’s think about it. When price is under VWAP, and the average long is red on the stock, and a breakout pattern sets up and begins to move higher those who are in the red will more often look to sell their shares at possibly less of a loss or even – thus stopping the breakout. Now on the flip side, if the same setup occurs when price is over VWAP the average long on that day is green and more likely to let the stock successfully breakout to higher levels looking for a better price to exit. This is not an exact science and you will see breakouts fail above VWAP and breakouts work under VWAP but I am just focused on where the better odds are.
So how do I use that basic info above? When I see any bullish intraday pattern setup on a stock and price is over VWAP I am much more likely going to try to scale full size into that trade and let a partial runner work after scaling out some shares for a profit. If the exact same pattern sets up and price is under VWAP I may still take the trade, but it will be with less size and a much tighter stop in case sellers look to continue to take control of the action. With that being said I have a rule that I never put on a full size long position on under VWAP and wait until price confirms over before sizing in all the way. Sure, I may miss a few trades with size here or there, but the rule has saved me from those month ruining losses way more times. It’s as simple as that and it’s just a piece of the puzzle to help add a little confidence when making decisions on the fly. When I combine it with additional triggers like bullish daily chart setups, time of day, upcoming catalysts, and sector strength it helps me stack the deck in my favor – and that’s what trading is all about.
Even if you don’t use VWAP and have no interest it’s helpful to think about why you use your chosen indicators/signals deeper than “just because I saw it used somewhere once”. And if you are interested in VWAP, this week just keep it up on your charts and when scanning through your watch list see if it helps you quickly gauge the strength or weakness of the names you are interested in.
Hope that made sense and keep grinding traders!
Just picked two random popular names for examples
3 thoughts on “How I use VWAP”
Thank you for this post Alex. What exactly does “full position size” mean for you? Do you have this defined in terms of a percentage of your account?
Great question and something I could definitely be more scientific about. The honest answer though is that I naturally base my size off my emotions. When I am confident about a trade because I know my specific % win rate on that very setup I find myself putting on larger $ size positions. When I am less confident (ex. price under VWAP) I notice myself getting a little nervous and putting on less $ size. Also because liquidity is a factor in my small caps I have to adjust size based on potential buyers of my shares. Sorry that probably didn’t clear a lot up, but i’ll try to think about a way to quantify it for better explanation at another time.
Thank you Alex!