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Thanks for pointing this out. I am afraid that the weekly VWAP that I have coded is more or less useless for this approach, as it shows a 1-day VWAP on Monday and a 5-day VWAP on Friday.

The chart below shows a rolling 3-day VWAP, or really is a VWMA calculated from a rolling 72 hour period. It does not show the offensive behaviour of the weekly VWAP.

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I use a session template, which divides the day into the Asian, the European and the US session. For the US session I use the regular trading hours + the after session of 6E as per contract specifications.

For 6E I basically use the ETH VWAP over the trading day from 5:00 PM EST to 5:00 PM EST. The RTH VWAP is less important when compared to index futures or commodities.

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

Mike

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The Rolling N-Session VWAP and the Triple-Session VWAP are multi-timeframe indicators. These are work in progress and I do not distribute them, because there are still some problems, which need to be resolved.

Last edited by Fat Tails; October 15th, 2011 at 06:01 PM.

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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?

Haha. @tigertrader deviated from the original subject of his own thread, which was all about VWAP trades.

He has now gone on to trading the yield curve. I would prefer a separate thread for yield curve trades, as it is a different and difficult subject. Currently inflation expectations have brought up interest rates on the long end of the yield curve, which is harmful for investments. The FED tries to manipulate the long end by selling shorter term maturities and buying longer term maturities to keep long term interest rates down. This also puts the dollar under pressure, which may explain why the widening of the differential between the German and French bonds has not been accompanied by a devaluation of the EURO, as has been the case in the past (see post in the Euro thread).

Now I am not sure what is the high probability trade here. Is it trading with the FED (going long the spread as a flattening of the yield curve is anticipated) or against the FED (going short the spread because the FED will not be able to bring down bond rates) ? In the end nothing will happen and the question is all about the timing.

Is this really a high probability trade?

Last edited by Fat Tails; October 16th, 2011 at 07:07 PM.

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". 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.

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Basically, what I am interested in is the method used to evaluate the probability of a winning trade with this setup and what the probability actually is, if it is known.

If the probability cannot be calculated as you say, then how can we say probability is high?