VWAP Trading Strategies

Trend and mean reversion setups

VWAP (Volume Weighted Average Price) is a trading benchmark used especially in algorithmic trading, significantly differing from a simple moving average as it incorporates volume into its calculation. This method gives a more weighted picture of both price and market sentiment over a specific time frame, making it a favourite among institutional investors.

Why is VWAP Important?

As a critical benchmark, VWAP is utilised by institutions to ensure trading is done at a favourable price, relative to volume. Companies like UBS, IB, and Goldman Sachs use VWAP algorithms to optimise their trading strategies, targeting the VWAP benchmark to minimise slippage and maximise trading efficiency.

How Can Traders Use VWAP?

  1. VWAP First Kiss Strategy:
    When the price has deviated from the VWAP for a significant period and returns, it’s often seen as an optimal value point, commonly resulting in a price bounce on the first touch. Traders might consider a long position during such retests, especially during less volatile trading hours like lunchtime.

  2. VWAP Magnet:
    In scenarios where the price has been relatively stable around the VWAP but starts to move away, it’s not uncommon to see the price being ‘pulled’ back towards the VWAP. This behavior acts like a magnet, with the VWAP drawing price back to itself, indicating a stable entry or exit point.

  3. Anchored VWAP:
    By anchoring VWAP at significant market events or dates, traders can identify how price reacts to this anchored VWAP over time. If the price retests this anchored level, it could signify a continued trend or a potential reversal, offering strategic trading opportunities.

Advanced VWAP Strategies and Insights:

  • Timing and Patience: Leveraging VWAP effectively requires careful observation of price behaviour in relation to the VWAP line. A patient approach, waiting for the price to cross back over the VWAP in the trade’s direction, often yields better results.
  • Combining Tools: Enhance VWAP strategies by integrating candlestick patterns, volume spikes, or specific time-based expectations to fine-tune entry and exit points.
  • Programming the VWAP: For those inclined to algorithmic trading, incorporating code that calculates the distance from VWAP can automate some of these strategies, although it requires a robust understanding of both programming and trading.

Conclusion

VWAP is more than just a trading metric; it’s a comprehensive strategy tool used by seasoned traders to gauge market sentiment, identify value, and optimise entry and exit points based on institutional movements. Whether you’re a day trader or a long-term investor, understanding and applying VWAP can significantly enhance your trading strategy.

Want to explore more? 

Check out Brian Shannons Anchored VWAP book, my post on Anchored VWAP trading strategies.

Also, 10 Trend Trading Strategies Webinar and 10 Mean Reversion Trading Strategies Webinar both contain more ideas on how to incorporate VWAP in your trading.