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SMAs calculate every bar as uniformly weighted in relation to the timeframe it is calculating.
EMAs calculate more recent bars with a heavier weighting in relation to the timeframe it is calculating.
VWAPs compare the current bar’s volume to the total volume independent of the timeframe it is calculating.
Technically speaking, the VWAP is a moving average but as Bob mentioned it is independent of the timeframe.
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- Trade what you see. Invest in what you believe -
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I wanted to provide an update on how I've been using @JonnyBoy's original template applied to the CME US Index Futures ETH session (he's using the RTH). I've added two new setups, that while I haven't back tested them as extensively as @JonnyBoy has the original four, have proven to be profitable. For all I know @JonnyBoy may trade similar setups, perhaps using less risk.
When trading these setups, I'm concerned less with historical probability and more with how price action behaves. I'm also fairly loose with my setup rules. From my experience, mechanically disregarding a setup because price trespassed a certain SD level is many times a missed opportunity. Perhaps trading with less risk in light of this behavior is a compromise for some rather than skipping the trade.
SETUP: Price has entered the +/- SD 1, SD 2 or SD3 band (SD 0.75 to SD 1.25. SD 1.75 to SD 2.25. SD 2.75 to 3.25) and has tested the extremes of the banded area. For a long setup, this would be price entering the band and touching +SD 1.25. Vice versa for a short. After flirting with the band's maximum, price then retraces back around the band's minimum (e.g. SD 0.75).
** note of caution **
This setup can potentially cause confusion if looking for the Standard Deviation Reversion Short setup. It is critical to observe price action around the band minimum to determine whether there is a high likelihood that price will break the minimum or continue back to the maximum. I'll many times have a pending limit order in the buy zone for the SD Reversion Short Setup, but am ready for a thrust. I use a volume cumulative delta indicator (not the native NinjaTrader version) to help determine supply/demand around SD levels.
** note of caution **
ENTRY: Place a buy stop in the buy zone above +SD 1.25 but below +SD 1.5. I have added additional VWAPs to my chart to pin orders to these SD levels. I'll normally shoot for +SD 1.375.
STOP: Place the stop in the stop zone around SD 1 (or 2,3). This is approximately 0.375 SD's of risk, so a relatively safe trade compared to some of the other setups.
TARGET: We are targeting a move to the next SD levle, however I'm conservative with this setup at the moment (lack of back testing) and like to take 75% or more of the trade off at T1. The rest can be taken off at T2.
BREAK EVEN: Once price starts to approach T1 (usually fairly quickly). I'll move my stop to break even. This is important because there could be a very quick price rejection. Normally I'll see price breakthrough T1 and continue to T2 and beyond, however I'm playing this very conservative.
I would like to add to this.
There is one possible way to change the VWAP value, you can admit pieces of Price and Volume. If you are to selectively pull out institutional trades and build the VWAP using those alone, you can build a more institutionally true VWAP. How you use this info is up to the trader, but I have found several ways to build a statistical edge doing so. I have not been as successful with VWAP that includes all volume data. I apologize if this has been previously discussed, I have not read through the whole post. Simple wanted to add my 2 cents.
Clever idea, and there is clearly a difference in the two charts.
Many traders do find regular VWAP to be useful, but it is entirely possible that a VWAP calculated this way would show you something new, and that you could exploit it.
I assume you distinguish institutional volume by size (?)... so it's basically a "big trades VWAP?"
Personally, I think that regular trading volume, regardless of size, does play a role in the market, and also that institutions may hide their size by feeding smaller trades into the market (not just icebergs, but we know that large orders get parceled out algorithmically to try to hit the VWAP or do better than it, because brokers get paid in part for executions that hit or are better than the VWAP, as a benchmark.)
I still think it's a cool idea, and basically, if it works then it's a good thing. Thanks for the idea.
Bob.
When one door closes, another opens.
-- Cervantes, Don Quixote
Here's a VWAP test setup that just developed and ended up profitable in the ETH session for NQ. I usually like to wait a few hours and really allow the VWAP and SD bands to develop before taking a trade, however there's some solid moves shortly after open.
Price opened about 20 ticks from previous close and consequently dropped 140 ticks. Price quickly rebounded above the VWAP before settling in +SD 2 and falling into +SD 1 to then go on and test the VWAP. Lots of price discovery going on.
I missed the first test entry, and actually entered late and poorly slightly above +SD 0.5. After seeing price test VWAP again and enter the buy zone, i doubled up my position; entering at a much better location between +SD 0.25 and +SD 0.5.
While my risk was doubled, I was able to lower my profit target to hit my daily goal to just around +SD 0.75 (T1 for the setup) from its original location around +SD 1.25. Not surprisingly, price thrust up all the way to +SD 2 in a single candle; blowing through my TP.
Exactly! This is a quite an advanced approach actually and something that hasn't been discussed here yet. The reason why I call this an advanced approach is because in general an institutional traders number one goal is to estimate volume profile of what instrument they will be trading for that day without any knowledge of that day's volume.
Once you can estimate the volume profile for the day you can then ''tune'' the VWAP accordingly. This means you can then estimate the VWAP for the day, but we are getting a a bit ahead of ourselves with that one.
Replicating your NQ charts for today I get this. I am not used to the NQ so I applied a trade filter size of 50. Are you able to divulge the filter quantity you use and how you calculate it?
Unfiltered VWAP - all trades
Filtered VWAP - minimum trade size greater than or equal to 50
A good starting point to define trade filter size in the ES is to look at the DOM at RTH open. I would take the average of the 10 levels of bid and ask depth and then divide that by 10. So, for example if the 10 levels of bid depth were 1,050 and the 10 levels of ask depth were 1,304...
1,050 + 1,304 = 2,354
2,354 / 2 = 1,177 (to get your average)
1,177 / 10 = 117 (filter size)
Now, this is just a starting point and will only be possible to display if you have ability to trade filter size and apply VWAP to those filtered trades. There is a while bucket of reasons why I do it like this.
Filtering trade size of course means that it will not account for the distribution or accumulation of large orders that get broken down and executed as smaller orders. What we are trying to do here parcel out the sigma events where large orders are executed as large orders.
I probably wouldn't have even got onto discussing this about how you can slice up VWAP in this manner, but it is a very valid approach hence the discussion is now open! I am now just wondering if you heard that somewhere, read it somewhere or just did it?
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- Trade what you see. Invest in what you believe -
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Trading: 6C (Low Margin,) 6E, CL, GC, ES and Maybe DX for smaller tick value
Posts: 1,394 since May 2011
Thanks Given: 1,719
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@JonnyBoy, may I request you provide the VWAP that allows for size filtering of volume? Perhaps I am just not noticing it in VWAPs that I have reviewed and would very much appreciate you or someone posting it. Thank YOU!
Yellow = Regular anchored vwap
Red = Adjusted "institutional" vwap
Problems I faced, I don't have access to market depth data, so I took more basic approach
This is just something I came up on the go so not sure if this is valid or not, but what I'm seeing right now is slightly more responsive VWAP, at least first impression is that
This is an interesting idea, worth looking into. Thanks Woodyfox
