VWAP Trading Strategies

Exploring Volume Weighted Average Price Trade Setups

The Strategies

Alright, we’re diving into the world of the VWAP indicator – A key tool used by many traders around the globe. (and me…)

Let’s start with the basics:

What is VWAP?

Just kidding.

Google can handle all that stuff – let’s get straight into the strategies!

I like to look at VWAP in two simple ways

  1. As a potential support or resistance area after an extended move.
  2. As a pivot point for a measured move extension.

Let’s explore:

VWAP Bounce

  • Price will often bounce off VWAP after an extension
  • We are looking for price to stretch away from the VWAP and then come back to retest
  • VWAP then acts as support or resistance

EG: S&P pulling back to VWAP after an extension

 

DAX pulling back to VWAP after a downtrend

It’s a pretty simple concept and one you can watch for on trend type days.

(I like to see the VWAP slightly broken and then pull the trigger as price comes back through.)

VWAP Extensions

Often price extends the same amount on one side of the VWAP as it does on the other.

You can frame this movement and expect similar in the other direction if the market is in a rotational environment.

EG: In this DAX chart, the upper extension is the same magnitude as the lower

 

So on rotational days, watching how far price travels can be a handy guide for attacking the other side of the move. (Trade targets or initiating mean reversion VWAP target trades).

BTW if you are on Trading Plan Pro, both of these are in the trading strategy template section of your dashboard.

 
Today, think if you could add VWAP to your playbook, and if you do already, are you using it to its full potential?

VWAP Algorithm

One of the reasons the VWAP is such a valuable indicator is its use as a benchmark by institutions and algos.

Take a look at this VWAP algo video by Interactive Brokers. They do have retail traders but are heavily used by institutions (Hence the self-serve algo offerings).

It gives you some insight into the settings institutional traders can change when setting the algo which should help you understand why the VWAP works well.