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Explosive VWAP Trading Strategy For Scalping & Day Trading Stocks (For Beginners) - YouTube
Channel: The Secret Mindset
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The VWAP is one of the best trading indicators
for determining intraday momentum.
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VWAP, meaning the Volume-Weighted-Average-Price,
tells you a very important piece of information:
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the average price at which an instrument is
traded over a given period of time.
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Basically, is the total amount of money transacted
during some period divided by the total amount
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of volume that traded over the same time frame.
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While VWAP is no holy grail, it is an effective
instrument for differentiating between random
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(meaning choppy price action) and non-random
(meaning trending behaviour).
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That why, in todayās video I will share
how I use the VWAP to time my entries and
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Iāll show you the precise pattern I search
for when Iām day trading stocks.
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VWAP represents the market's True Average
Price over the plotted length of time, most
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commonly a trading day.
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While the other popular technical indicators
are displaying data based on a recent number
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of candles, the VWAP has a cumulative nature.
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Thatās the problem with periodic indicators,
like moving averages for example.
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Letās say you selected a 10ema or a 20sma
to trade with.
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Data from beyond the look-back period youāve
selected is no longer factored into the calculation,
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leaving you with an incomplete picture of
the market.
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VWAPās cumulative nature allows you to see
the full picture develop over the course of
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the day while factoring in each candle.
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No piece of data gets left behind, as each
transaction that has occurred should factor
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into how you interpret the current state of
the market and what's most likely to happen
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next.
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Unlike traditional moving averages which simply
sum up the closing price of an instrument
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traded and divide it by a number of predetermined
periods, the VWAP gives you the true average
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price of the instrument by additionally considering
the transaction volume at a specific price.
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In addition to providing increased context,
the cumulative calculation of VWAP prevents
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confusion regarding selected chart time frames
and indicator settings that exist in nearly
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every other piece of technical analysis.
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It doesnāt matter if you use a 1-minute
chart, a 30-min chart, or anything in between.
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There is only one intraday VWAP.
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Flipping between time frames will affect only
the display of the VWAP behavior, but the
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calculation remains constant.
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The same canāt be said for periodic indicators,
where a 20-period moving average on a 1-minute
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chart will often look drastically different
than it would with any other period, like
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the 5-minute chart.
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The reason why VWAP is highly effective is
because it acts like a magnet, either attracting
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or repelling the price.
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For this reason, VWAP indicator can help you
to identify support and resistance levels.
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Since the indicator averages the total periods
for the day, it has psychological meaning
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on the chart.
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If the price approaches the VWAP from below
and starts hesitating in the area, then the
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VWAP may be considered resistance.
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If this happens in the opposite direction,
then the indicator might be able to support
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the price, creating a bullish movement.
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Now that we covered the basics of VWAP, letās
see how we can apply it to day trading and
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scalping.
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Considering that the VWAP offers dynamic support
or resistance through the day, the trading
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plan would be:
ā¢ to identify a probable trend that's expected
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to continue
ā¢ and to enter the trade around VWAP area
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with defined risk
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If you analyze any chart, you will notice
that when stocks go on strong trends and get
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extended from the VWAP, they will at some
point pullback before the continuing trend.
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Waiting for this pullback takes patience.
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Most novice traders chase the stock when it
is going up, and then sell for a loss because
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they bought when it was extended.
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The stock almost always pulls back to its
VWAP at some point during the trading day.
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Thatās why itās better to wait for the
pullback and donāt chase the market.
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This gives you better Reward vs Risk on your
trades and helps you time your entries and
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exits.
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So the idea is to buy a retracement to VWAP
after a strong upward move and to sell the
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retracement after a strong downward move.
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But this strategy alone isnāt enough to
record consistent results.
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Often times, the price will cut though the
VWAP with ease.
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Itās not about taking a signal, itās about
filtering and trading only the high quality
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setups.
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The greatest value of a trading setup is not
the entry it offers, but the stop-loss it
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implies.
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For VWAP setups, our stop-loss is always on
the other side of it.
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A high quality setup offers a reliable stop-loss
point that the market is unlikely to hit in
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the near future.
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The stop-loss of a high quality VWAP setup
is often a solid support point in a bullish
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market or a resistance point in a bearish
market.
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Remember this: a high quality VWAP setup usually
occurs at a key support or resistance level.
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A long trading setup at a support area is
superior to one that is located in āno manās
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landā.
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A short trading setup is more promising if
it appears as the market tests a resistance
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area.
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So there are 2 factors you should consider
in assessing the quality of a VWAP trading
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setup.
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First is the VWAP line on your chart and second,
as we target a pullback of a stock, the 50%
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Fibonacci retracement.
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What Iāve found out when I was analyzing
trends is that most major moves, and many
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minor ones, will eventually retrace to around
the 50% level of the move.
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Thatās why I started to pay extra attention
to these areas.
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To draw effective support/resistance levels
using the concept of 50% retracement, the
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key is the price move you choose.
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The price move must be a strong one that has
momentum on its side.
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I primarily only use the 50% level, but for
me it is an āapproximateā 50% retrace,
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and that means if a valid signal forms near
the 50% level, say anywhere from a 50% retrace
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to a 60% retrace, I will also count that as
a valid retrace.
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Now, the strategy is all about finding confluence
between VWAP and the 50% FIB level.
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For a long signal:
We look for a bullish price move that clears
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above a previous swing high with strong momentum.
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We mark out a āretracement zoneā between
50% and 61.8% of the price move.
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If price falls down to the retracement zone
and the VWAP offers additional support, we
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aim to buy a possible rejection of that area.
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In this example, we have a first strong upswing.
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We have consecutive bullish bars which rose
above the last swing high
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We drew the 50% and 61.8% retracement levels
of the bullish move.
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The area between them is the retracement zone.
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This sharp retracement down found support
at the VWAP, right in the retracement zone.
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The candlesticks that followed had lower shadows
implying bullish pressure.
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Thus, the confluence area between VWAP and
50% zone was a valid signal and offered a
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high probability trade.
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Stop loss below the confluence area and ideally,
aim for at least 1:1.5 risk reward ratio.
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Please bear in mind that you should evaluate
the market bias before assessing individual
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trading setups.
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The market bias trumps any individual VWAP
trading setup.
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If you get the market bias wrong, regardless
of the quality of the trading setup, it will
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not work out over the long run.
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For a short signal:
Look for a bearish price move that clears
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below the previous swing low with strong momentum.
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Mark out a āretracement zoneā between
50% and 61.8% of the price move.
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If price rises up to the retracement zone
and the VWAP offers additional resistance,
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we aim to sell a possible rejection of that
area.
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Here we have a bearish move that brought the
market to a new low for the day.
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With this bearish move, we drew a 50% retracement
zone, which also aligned with the VWAP
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As the price reached the confluence area,
we had a trendline breakout which offered
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additional confirmation that the bears are
in control of that area.
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Given the confluence of resistance levels
and VWAP, this trading signal was valid.
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More specifically, the entry timing offered
by the setup was appealing.
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The advantage here is that VWAP is more responsive
to price movements on significant volume versus
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those with less money behind them.
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As VWAP absorbs more price and volume data
over time, it becomes more resistant to random
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oscillations and sudden shifts
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Here are other examples of valid VWAP trades.
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One of the reasons I prefer trading with VWAP
is its ability to eliminate the noise that
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occurs throughout the trading session.
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Knowing the price at which a majority of the
volume has traded makes it easier to evaluate
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a good level to buy or sell.
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Also, remember that the best setups often
appear together or close to one another.
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By looking for a confluence of patterns, we
are able to identify the high quality setups.
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The point is that when you find clusters of
trading setups pointing in the same direction,
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you find quality.
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An additional tip is to focus trading this
setup on large-cap equities with sufficient
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average daily volume, typically familiar names
that move smoothly and follow VWAP levels.
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Also avoid pre and post market and the first
15 minutes after the open.
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VWAP tends to be jumpy and unreliable during
those periods while it establishes itself.
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Remember to apply money management rules when
trading based on the VWAP indicator, and it
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would hurt to look for additional confirmation
signals from candlestick patterns, chart patterns,
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or other price action signals.
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As always, if you learned something new and
found value, leave us a like to show your
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Until next time.
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