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You just asked a very valid question. The higher the volatility in the market (larger swings) the more expansion you will see in the VWAP bands. This is what takes the time to study. Tighter bands (at the beginning of the day) means it's much easier to spot a trade.
In the following chart, the first 2 green lines were entry locations from a VWAP test. The 3rd and 4th green lines were SD entry locations for an SD continuation trade. The 5th and 6th green lines were entry locations from a VWAP test. I generally don't like taking SD continuation trades from the 2nd SD band unless it was an Open Drive type of day.
It gets more difficult to define entries when the band expansion becomes very large. You will take "fake" VWAP tests and "fake'' SD continuations, but this is why you need to educate yourself with hours in front of the chart.
If I was a beginner, I would start with VWAP tests and move on to SD continuations. If it isn't a VWAP test it is a VWAP Cross, which is an entirely different setup.
So, look at what price does when it ventures into the VWAP zone. It is within this zone that magic happens. Study it. Feel it. Exhaust it. Look at every conceivable thing that price does in that zone. Use cumulative delta to help if required. Record your screen. Play it back over and over, slow the playback down. Study it. Feel it. Exhaust it.
Hint: It is much easier trading stocks using VWAP than futures, so perhaps start there.
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- Trade what you see. Invest in what you believe -
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Thanks for sharing your knowledge of VWAP and its uses in this thread. Why do you feel trading stocks using VWAP is easier than futures? Higher probability of a setup resulting in a profitable trade?
Trading: Primarily Energy but also a little Equities, Fixed Income, Metals, U308 and Crypto.
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Random Comment :- Always been surprised that futures exchanges don't publish end of day VWAP numbers. If you have ICE's front end WebICE you can see the VWAP of every contract, but no way to retrieve it historically!
Beats me why anyone would trade anything without watching VWAP. The VWAP bands are probably the only trendlines that really matter.
"If we don't loosen up some money, this sucker is going down." -GW Bush, 2008
“Lack of proof that something is true does not prove that it is not true - when you want to believe.” -Humpty Dumpty, 2014
“The greatest shortcoming of the human race is our inability to understand the exponential function.” Prof. Albert Bartlett
The main advantage of VWAP is its simplicity. Because of this, the use of VWAP as a measurement tool and execution strategy is both easy to compute and understand.
At any one time, there could be hundreds of stocks that sit within the parameters of a VWAP setup, although VWAP on an illiquid stock is less than ideal and not recommended. You can set up a scanner to evaluate price against VWAP on every stock in the DOW or SP500 and be notified very easily by your platform, but don't get carried away. In general the heavy hitter stocks are good enough.
In my experience, stocks appear to conform to the VWAP setups ''better'' than any futures instrument does. I don't have any evidence per se to prove this, but I guess experience has taught me that.
I find that trading the VWAP of futures instruments is a little more challenging but IMO it is an essential thing to be able to do. Since VWAP is an uncomplicated benchmark, most VWAP trading strategies are simple and relatively quick to execute.
Here is the chart for the first hour or so on ES today. These are just simple setups. Remember this is on my own data series as time based data series just didn't do it for me.
Having said that, it doesn't mean you won't get caught out intrabar thinking a setup has begun when it hasn't, but in general;
- 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 continue down trending
- if price is trading below VWAP and beyond -1st SD you can expect price to oscillate around VWAP
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- Trade what you see. Invest in what you believe -
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Thank you kindly for your response, I appreciate that!
Do you consider where price is today relative to prior days in determining setups or do you trade the same VWAP setups regardless of 'big picture context'?
Yes. The attached screenshot shows the rolling VWAP for the last 7 RTH trading days. You don't really need any more than that for short term trading because they tend to get very flat and the quality of the rolling level 'degrades'.
But, you should also have the static RTH VWAP level shown for as many days as you need, with respect to where price is trading of course. These levels are important because the market has a memory when it gets to them. The weekly and monthly VWAPs both rolling and static are also valuable information to have on your chart.
I trade 2 distinct methods, this is just one of them. My other is an algorithm that doesn't use VWAP at all, but you should always have the levels in mind.
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- Trade what you see. Invest in what you believe -
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Hi, I understand you use tick chart for your vwap strategy. Do you adjust your tick aggregation level per market conditions? Your previous chart shows 987 ticks. I imagine for quieter market like 2 months ago, you would use something like 500 ticks? Or do you always stick to the same setup?
I created my own data series that is built from tick data but it isn't a tick chart per se. However, I would use nothing other than tick charts, but that is my opinion.
So, I use 987 as my base tick reference and I increase this to 1587 for volatility.
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- Trade what you see. Invest in what you believe -
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