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VWAP for stock index futures trading?


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VWAP for stock index futures trading?

  #51 (permalink)
 
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 bobwest 
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Salao View Post
I don't know that much about VWAP, but I think this helps...So VWAP is a derivative of a distribution curve similar to market profile? If price was trending up and price got above the std. dev. line then traders would sell, returning price to the VWAP line where previous value was agreed upon (to overly simplify things)? I also read (in this thread I think) that traders are in part compensated for their executions in relation to VWAP. Is this true? Interesting stuff!

VWAP has a family relationship to market profile/volume profile, but is not the same. You could think of it in similar ways in terms of using it, however.

"VWAP" = "Volume Weighted Average Price." It's the average price, from the beginning of some period, usually the current day, up to the latest trade. The price of each trade is weighted by its volume and figured into the average, which simply means that big trades have more impact than small ones. It results in a curving line that updates throughout the day (or whatever the period is), and that shows essentially what the average price has been up to now. Weighting by volume means that the important transactions in terms of size are more important in terms of the average.

It is not like a moving average, since its anchor stays fixed at the start of the period, and the only part that "moves" is the end-point. When the day (or other period) is over, it resets and starts at the first trade of the new period.

Here's the VWAP for ES yesterday. I started this particular VWAP at the open of the overnight session, so it includes Globex as well as regular trading hours (RTH). On tomorrow night (Sunday), when Globex wakes up, it will start again at the first price of the overnight session. The actual VWAP is the central dashed line. Notice that it's got some bands above and below that line. These are the standard deviation bands, which people usually put on their charts as well. (This is a 10,000 volume chart, not a time-based chart, so the lower-volume overnight period is scrunched up to a smaller part of the chart, and the higher-vol RTH is more spread out. VWAP, being based only on price/vol from a particular point, is always the same, regardless of the chart type or timeframe.)




There is a tendency for price to move in fairly orderly ways within and between these lines, but this can be deceiving because it works differently in strong trending days, like this (5/7/19):




You can see that price is acting very differently, but the standard deviation bands still have relevance, acting to contain price on the way down, and, in this particular case, on the rebound at the end, where traders pretty much pushed price back to.... (ta-daa!) the VWAP. Obviously, this doesn't always happen, but the levels are often useful to know.

Here is a range day (4/25/19) followed by a trend day (4/26/19) where price just kept on going:




It's a cool tool, but there are so many....

Bob.

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  #52 (permalink)
 
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 Salao 
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Yep I'm interested! Haha! Thanks @bobwest for putting that together! I might have to take a look at that as part of my EOD studies. It's interesting how the market will ride those Std dev lines like that. It's also interesting when the market returns to the VWAP line. I would imagine it does that often during profit taking times like EOD, EOW, EOM. I mean you probably can't set a watch to it by I imagine there are some pretty high probability setups involved there.

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  #53 (permalink)
 
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Salao View Post
Yep I'm interested! Haha! Thanks @bobwest for putting that together! I might have to take a look at that as part of my EOD studies. It's interesting how the market will ride those Std dev lines like that. It's also interesting when the market returns to the VWAP line. I would imagine it does that often during profit taking times like EOD, EOW, EOM. I mean you probably can't set a watch to it by I imagine there are some pretty high probability setups involved there.

Yes.

The thing is, if you observe either market profile or volume profile, there are days when price stays within the profile's early boundaries and wants to go back to the value area, and there are times when it cuts loose and just goes up and up (or down and down), and never comes back. That's why I put in the last chart, which shows both.

Any day that ends on a new high will end above the VWAP, often by a lot. Also, it will end above the profile's value area, and the profile's distribution may have many humps from price working its way up (or down.)

So, in one of the charts I posted (the second one), price went back to the VWAP after a good decline. But it is wise to not expect that all the time, any more than you would expect price to always seek the POC. Different days will act differently, and traders need to scope out what is happening, and as early as they can (and be ready to change.)

Short version: if you already know price will hit a new high (yeah, I'm sure you will know that ), then you know it will finish well above the VWAP, probably at a high band. If you know price will stay in a range, then you know that price will stay... in a range.

It's not that bad, because these lines can help you figure out what's going on. But you may want to think of them more as context than prediction. @wldman referred to VWAP as "dynamic value," which is a good way to think about it all.

The bands will also often serve as support or resistance, which is worthwhile too.

As with everything else, try it out and see what you get.

Bob.

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  #54 (permalink)
 
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I don't drop into the forum as much as I did in the old days of The Scalper's Journey, but I appreciate the nod from @bobwest and find my thoughts about the VWAPs inline with him and @JonnyBoy.

I am a short-term trader looking for relatively small targets of 10 and 20 on YM and NQ, and sometimes leaving a runner to get something extra. I would put the vwaps at the center of my trading -- they are not the be-all, end-all, but they are a dang good start. I watch ES, then take trades on YM and NQ, depending on which will give me the most mileage on that particular day.

I have four vwaps on my chart -- ETH, RTH, Weekly and Monthly. I also use an indicator that shows yesterday's vwap as well as last week's vwap. Early in the RTH, I am very attentive to both ETH and RTH, but as Bob mentioned, the gap between them tends to close as the day moves on, and they're often quite close by day's end. As a scalper, I watch approaches to vwaps closely -- they quite often provide a quick reversal (could be a bounce on an uptrend day) which will be followed by the other indexes. I am not a keeper of hard statistics, but trading VWAP for a reversal (bounce) is high percentage. Does it always work? Of course not. Nothing does. Some days, I can tell it's not going to work because we are moving very erratically (usually this means the president is tweeting), so I stand aside until I see enough hesitation to get in. Because I watch the ES, which is attentive to many support/resistance levels -- OR-High and Low, value area POC and VA-H and L, etc. -- I'm always really happy to see the weekly or monthly vwap being approached. Trading a reversal at those lines is money very often.

Now, I understand that many of you will deny that scalpers can make money. I beg to differ, but I am not arguing that vwap is a trade-generator for everyone, either. I wouldn't even be qualified to comment on vwap as a trade launch for someone who looks for much larger targets. (Although @Inletcap's favorite trade is a bounce off the OR-H with vwap right there for support.)

Still, as @JonnyBoy said, it makes a difference and provides significant guidance regardless of your trading style. If, for instance, you were about to take a trade and initiated it as we came into the vwap levels, you might be sadly surprised to see your trade go in the opposite direction, at least for a little while.

I am not a big picture person when it comes to trading, though I appeciate the wisdom of folks like @JonnyBoy and @wldman. I mean, I look at the daily and a few HTF charts before the day starts, but I'm more about what's happening in the next 10 minutes than what's happening three hours or days later. I'm just not very good at that. But for scalping, let me say this: if you are not looking at the various vwaps, there might a part of you that doesn't really want to make money.

Cheers,

mlm

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  #55 (permalink)
 
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michaelleemoore View Post
I don't drop into the forum as much as I did in the old days of The Scalper's Journey, but I appreciate the nod from @bobwest and find my thoughts about the VWAPs inline with him and @JonnyBoy.
...
Cheers,

mlm

Good to hear from you again. Come back more often....

Bob.

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  #56 (permalink)
 
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Please help me by posting in the changelog thread and include an example URL, I'll have to take a look.
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Screencast tags havent been working for a while. May be @BigMike can help?

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  #57 (permalink)
 
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brakkar View Post
Hello,
in the stock world, vwap is an indicator widely used in particular with big professional money managers that use it to asses the performance of traders.

Is this indicator relevant in the stock index futures world? Is it used and watched by large professionals? Should I even bother watching in when trading intraday on the ES/MES?

@brakkar, with all the noise and dust raised in some of these discussions, have you had your original question answered to your satisfaction?

I feel things got substantially off-target, although I believe they came back near the end. I feel a little sorry for getting into some of it, and I wish I had just thought to post the charts I put up a few posts back a little sooner. I think they make clear the way that VWAP can help frame the day's price action. The tactics a trader would need to take to make use of VWAP and its bands are up to each trader, who will probably have his own ideas, but they do show real things happening in the market, and can let a trader get a better handle on what is going on.

Also, VWAP is one tool of many. Some traders use it, some do not. You can't use everything, after all.

I hope some of this has been helpful to you.

Bob.

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  #58 (permalink)
 
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@Salao Value Area is defined as the range of prices where 70% of the previous session volume has occurred. VWAP is Volume Weighted Average Price over a given period, usually ETH session measured during that session. I view one standard deviation from the VWAP as dynamic value area. Value Area is the price range boundary inside which 70% of the prior days' volume has occurred. One std dev from VWAP is the boundary within which 68% of the current session volume has occurred.

Market Profile is a little more sophisticated measuring time at price and volume. A letter is assigned to each 30 minute block of time. Price then builds a histogram showing the distribution of price over time.

Often Profile charts with have value area lines on them as well...but these are typically three different things.

Hope that helps.

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  #59 (permalink)
 
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I answered based on where I left of, not on where the thread was when I got back to the desk. Many posts above my previous one do a better job to answer the original question than I have.

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