JonnyBoy's reasonably definitive guide to VWAP - Part Six

VWAP CROSS SHORT SETUP

The following example is picture perfect and should be considered in a COUNTER TRENDING environment. By that I mean all of the boxes were ticked in terms of this particular setup. However, as we all know even at the best of times trading is like walking around in a grey fog. There will still be valid setups that don't tick all of these boxes but are still good trades to take. Conversely, there will be times when all of the boxes are ticked but the trade just doesn't work out. You need to spend time in front of your chart analysing this and working through all of the nuances and paths that price can take around VWAP to +SD 1 TO VWAP. As I have stated earlier, this isn't a silver bullet.

VWAP SLOPE: The slope of VWAP ideally should be flat or extremely mild. It should start to slope in your direction as price transcends from VWAP to –SD 1.

SETUP: Ideally, price should transition from VWAP to +SD 1 to VWAP. A initial touch of +SD 1 is IDEAL, but doesn’t always happen. If however price traverses more than +0.25 above +SD 1, this short setup should be ignored. This doesn’t mean price won’t break back down towards VWAP, but rules are rules.

ENTRY: Place a SELL STOP within the SELL ZONE. This essentially means somewhere between -SD 0.25 and -SD 0.5 and inside the VWAP Chase Band (yellow hashed line). Don’t chase your entry beyond this line.

STOP: Place your STOP within the STOP ZONE, somewhere between +SD 0.25 and +SD 0.5. Essentially the width of your stop is 1.0 SD from your entry. If you want a tighter stop use 0.5 SD from your entry.

TARGET: You can start to take off your position at T1, T2 and T3 which is essentially -SD 1 and the ‘’band’’ surrounding it. If you are still holding a position you can always trail your stop with an aim to capture a breakout. In this instance you should trail you stop with either a 0.5 or 1.0 standard deviation stop width.

BREAK EVEN: Depending on the risk tolerance of the trader you will have to determine when you move your position to break even. In some instances, price won’t make it past T1 or T2, so trade according to your risk.

JonnyBoy's reasonably definitive guide to VWAP - Summary Of Initial Setups

Before I move on and show some more advanced VWAP setups, let's spend a little time contextualising the setups already discussed.

First, let's take a look at the first 2 hours of trading for the 18th April, 2020 on the ES and the setups relating to VWAP that unfolded. I have added some small triangles to identify entries and exists that should have been considered, but you might have to zoom in to see them. The only indicator you see here is RTH VWAP and its standard deviation(s).



What must be understood is that identifying retrospective VWAP setups (and any kind of retrospective setup) is easy. The skill and effort required by the trader is to start recognising these setups as they unfold in real time. It isn't easy and requires lots of screen time, but what I am showing here is a bona fide way to make a living as a trader. Yes, you heard that correctly. You can make a living trading these VWAP setups.

The first step to understanding these VWAP setups is to load as many days of chart history as you can, 60, 90, 180+ days. Slowly work you way through each chart. Track the price movement (open, close, high and lows of every bar) and manually identify every VWAP setup you see. The first 30 mins of any trading day using VWAP can be quite tricky because VWAP typically hasn't had much time to develop, but still identify these. Once you get to the stage where you can identify these setups by a quick glance of your chart, you should then transition to watching the chart unfold live.

The idea is to look at the charts and ask yourself, what is price trying to do and is it doing a good job of doing it.

As I have suggested in prior posts, stocks appear to "behave'' much more in alignment to the setups shown. And the bonus is you have many high liquid sticks to choose from, so a VWAP setup is never far away. Futures are a little trickier but with time they can be VWAP tamed.

Will every setup work out? No! Of course not. You'll take losing trades. In the beginning that is all you might take as you begin to mentally deconstruct what price is trying to do when it gets into these key areas and forward construct what it might do. My mantra has always been this. Study it. Feel it. Exhaust it.

On a basic level this is why trading VWAP helps you;

It helps identify a likely trend, counter trend or continuation of trend

- if price is trading above VWAP and beyond +1st SD you can expect price to continue up trending
- if price is trading between VWAP and +1st SD you can expect price to oscillate around VWAP
- if price is trading between VWAP and -1st SD you can expect price to oscillate around VWAP
- if price is trading below VWAP and beyond -1st SD you can expect price to continue down trending

It helps identify credible support and resistance levels

VWAP and the standard deviations of, are giving you real time support and resistance levels. The trouble with "regular'' support and resistance lines, whether drawn horizontally or diagonally as trend lines is this; they just don't work. There is a thread on FIO dedicated to the random line theory. Regular support and resistance lines, including trend lines fall into the category of a self fulfilling prophecy. With VWAP however, all the criteria not to fall into this trap is met.

No silver bullet exists anywhere in trading, but I would rather trade an institutionally recognised indicator than anything else. These are credible setups that limit your ability to impact the analysis, which is exactly what you want.

As for my trading, I trade 2 distinct methods. VWAP of course, plus my own customized algorithm that doesn't use VWAP in its calculations at all as it is based on decomposition theory. This may appear counter intuitive, but having two completely separate methods allows me a lot of flexibility in my trading.

Is VWAP for everybody? Of course not, but if you are looking to get a foothold in your trading and don't already have one, VWAP could be for you.

JonnyBoy 

It helps identify a likely trend, counter trend or continuation of trend - if price is trading above VWAP and beyond +1st SD you can expect price to continue up trending - if price is trading between VWAP and +1st SD you can expect price to oscillate around VWAP - if price is trading between VWAP and -1st SD you can expect price to oscillate around VWAP - if price is trading below VWAP and beyond -1st SD you can expect price to continue down trending

These are incredibly helpful. I do find it challenging when occasionally, price oscillates around 1st (-1st) SD - in other words, not in a trend, but not mean reversion (to VWAP) either. I wonder how you would trade these days. Thanks!

shzhning 

These are incredibly helpful. I do find it challenging when occasionally, price oscillates around 1st (-1st) SD - in other words, not in a trend, but not mean reversion (to VWAP) either. I wonder how you would trade these days. Thanks!

Indeed. There hasn't been many days with oscillations around VWAP recently on the ES! Large swings tend to open up VWAP and the SDs, so the envelope in which to work these entries becomes very large, which isn't always that favourable either.

However, on a brief look at my charts I found some short lived oscillation activity around VWAP that should give you an idea of what to look for. The key is that the T1 (target 1) was hit on the valid setups, so profit was achievable. However, with oscillation around VWAP you shouldn't be waiting for a large move. Short, sharp sweet entries is key. There is nothing wrong in removing everything off at T1 when price is oscillating, and perhaps just leaving a single contract as a runner with a break even stop. If you catch a break then great, if not then no big deal.

These are the little nuances you can be on the look out for. Weak touches of the +SD1 and -SD1 bands will likely be the name of the game here.

Thanks for the quick response. I probably did not make myself clear though. I find it especially hard to trade when price chop around 1SD (or -1SD) , not VWAP. Like a few weeks ago on TN ultra note, price oscillate around 1SD for much of the day - it did not retrace and test VWAP, and no momentum to go beyond SD1. Neither trend nor mean reversion trade would be profitable (unless you're HFT or scalper). Any thoughts?


TN 3-27-2020

I just wanted to express my appreciation for the time and effort you have afforded us all in putting together your Definitive Guide to VWAP Trading. I find it to be one of the most comprehensive and concise writings on the subject. I'd really appreciate if you could occasionally post a chart now and again highlighting particular VWAP setups to further our understanding of the subject !!
Many thanks !!

shzhning 

Thanks for the quick response. I probably did not make myself clear though. I find it especially hard to trade when price chop around 1SD (or -1SD) , not VWAP. Like a few weeks ago on TN ultra note, price oscillate around 1SD for much of the day - it did not retrace and test VWAP, and no momentum to go beyond SD1. Neither trend nor mean reversion trade would be profitable (unless you're HFT or scalper). Any thoughts? TN 3-27-2020

I looked up the TN market for the same day. I am actually seeing something quite different with respect to VWAP vs. your chart. I identified a number of opportunities that respected the VWAP setups and I am seeing that price did in fact oscillate between VWAP, +1 SD, VWAP and -1 SD. Quite perfectly actually.

I was curious as to the differences but I figured it out. It appears you are starting your VWAP (and SDs) at the beginning of ETH and letting them continue into the RTH session. You should be starting a new VWAP (and SDs) at the beginning of RTH for the instrument you are trading. You can see my ETH VWAP on the same chart (the dodger blue dashed-dot line) matches the VWAP on your chart, which confirmed to me you were using the ETH VWAP.

I don't know your trading platform, so I don't know if you can select to start a new VWAP at the beginning of RTH. It is important to use RTH VWAP. You can keep the ETH VWAP on your chart for reference as this is still relevant as support/resistance. In fact, you can use the ETH VWAP SDs too, but these are often weak as they were created on much less volume than the RTH session, plus it isn't worth having so many lines causing confusion.

Failing not being able to customise an RTH VWAP on an ETH session, you can always have just an RTH session only.

I hope that helps.

Thank you JonnyBoy for your time, efforts and generosity.
In one of the posts you mentioned using Cumulative Delta with VWAP. I can see in the chart you posted in post#33 that there is CD on the chart; are you using BB on the cumulative delta and how are you using CD with VWAP?
Thanks in advance.
Makhan

Aregon 

I just wanted to express my appreciation for the time and effort you have afforded us all in putting together your Definitive Guide to VWAP Trading. I find it to be one of the most comprehensive and concise writings on the subject. I'd really appreciate if you could occasionally post a chart now and again highlighting particular VWAP setups to further our understanding of the subject !! Many thanks !!

No problem! The only reason I posted was because I noticed a few vendors charging money for a VWAP course. I don't know what is in those courses so I can't necessarily comment, but paying for this stuff that doesn't involve anything proprietary is too much.

I will certainly look at posting some charts moving forward.

@JonnyBoy

Thank you for your time and effort!

I do look at RTH as well. I use thinkorswim and 5 min chart. I remember 3/27 because I had a feeling TN is going up, but most of the move was made during night session before RTH, and then again right after 3PM. RTH session was so tight that sometimes one single 5 min bar would cover the whole range between VWAP and 1st SD. There's no room to for trade to develop.

Thanks again and enough for my rambling since this is a thread about index futures trading