As small individual traders, we try to enter and exit at one precise "near perfect" point in the price action. So we are mostly looking at an arbitrary VWAP period, most likely, intraday- RTH only. We tend to forget that large market makers and other large actors are trying to enter and exit the market discreetly, for their own positions, monitoring their own specific durations of the VWAP.

The important VWAP to monitor is different for each participant and is dynamic. If large players plan to accumulate/distribute a security over x number of days (as determined by their liquidity algorithms), they will try to buy below the x-days VWAP and to sell above the x-days VWAP.

As relatively small players, the best we can do is to consider the proper VWAP for our own trading horizon. For example, in a trending market, swing traders like to buy weakness on a rising 5-day VWAP and sell strength below a declining 5-day VWAP. In a range market, where the VWAP is horizontal, traders can trade counter to the trend, and profit from fading moves to the plus or minus, 2nd standard deviations.

Therefore, when looking for an extended move, you should be considering a longer time-frame for your VWAP. The chart below illustrates the weekly VWAP for the ESZ, where a failure from the +2SD, when the VWAP is slope-less, not only works, but turns out to be the recent high of the move.

@ Fat Tails

Do you split anything up for the 6e? Thanks.

@ Fat Tails, please post a link to download the VWAP indicator.

Mike

Just out of interest - what is the probability of this setup producing a profitable trade?

In comparison to other setups you have, how much does the probability vary? How much higher is the probability on this trade compared to say, the next best setup you have?

FT - I was more interested in the setup in the OP.

If the OP has moved on from it, then perhaps the probabilities weren't so high.

My specific interest is because I've yet to meet anyone that has been able to quantify any trade setup and so am interested in the process that was gone through to evaluate the probability.

I do not understand what is "OP".

I do not understand what is "OP". Could be something like "opening price" or "original post", but neither makes sense.

The VWAP trade is indeed a high probability setup, if the data which is used is statistically significant and if the model used is accurate.

It is widely known that an event outside 2 standard deviations - or a 2-sigma event - represents a probability of 4.6%, so if you initiate a countertrade, once price is outside the 2SD band, there should be a high probability that price reverses and trades back into the envelope.

The VWAP bands measure the standard deviation of the distance of the current close from the current value of the VWAP (that is in mode Variance_Distance). So if price trades outside the bands, this is a 2-sigma event. The problem with this reasoning is that it relies on a number of assumptions

(1) that price moves are non-correlated and therefore follow a lognormal distribution
(2) that the average price and the bands are statistically significant representing an anchor

(1) is clearly not the case, if prices are trending. After all trending means that there is positive feedback between consecutive price moves and this in contradiction with the assumption of randomness and a lognormal distribution.

(2) is not the case during the beginning of the session. The VWAP bands are simply not stable during the first 60 minutes into the session, so the average price and the standard deviation bands have no meaning.

So the VWAP trade only is a high probability trade, if you wait 1 hour into the session and if you are sure that price are not trending. The first condition is relatively easy to obtain, the second one needs additional filters or indicators allowing you to verify that the price moves are mostly non-correlated. I am afraid nothing that can be calculated, but something that only can be verified via backtests, and as we know those results represent the past and not necessarily the future.