Top Trader_5. Practice Vwap Strategies

Lesson 5: Practice Vwap Strategies

What is a 'VWAP Cross'?
A VWAP cross is a trading indicator that occurs when a security’s price crosses the
volume-weighted average price.

Technical systems can typically be programmed to chart a security’s market price
and VWAP through candlestick patterns and trend lines drawn on a technical chart.
When a security’s price crosses a VWAP trendline then a VWAP cross signal occurs.
Traders typically consider VWAP trendlines similar to resistance and support
trendlines. In a VWAP charting pattern, a VWAP trendline is a single trendline
charted on a candlestick chart.
This price pattern focuses on the movement of the VWAP. For a trader using a
VWAP trendline, it is important to understand the VWAP’s calculation.
The VWAP calculation goes as following: You take the security shares bought, you
multiply by the security share price and you divide all of that by the number of
security shares bought.

VWAP is a moving average trendline that allows a trader to visually chart the effects
of a security’s volume in comparison to its price. The VWAP calculation is centered
around the volume a security is experiencing from day to day. Other potential volume
variables that may be used in conjunction with VWAP include the Positive Volume
Index and the Negative Volume Index.

VWAP is a trendline that has two influencing factors: volume and price. Thus, several
scenarios can occur from changes in volume and price. Generally VWAP can be a
useful trendline to include on a trader’s candlestick chart. VWAP may be trending
above or below a security’s candlestick pattern.

In this image we can see the VWAP trend line used while viewing both price
movement and volume .

Inferences from the variables in VWAP are primary drivers of buy and sell signals for
traders. The immediate affects of drastic volume and price changes that can be seen
from following VWAP, make the VWAP trendline a popular trendline for traders to
follow. If a security's price is trending below its support level, a rapid increase in
volume and price simultaneously will cause the VWAP trendline to spike significantly,
crossing over the security’s current price. This can create a potential bullish buy
signal. Adversely, if VWAP has been high and spikes to the downside it can be a
bearish sell signal indicating that the security is expected to trend lower following the
cross pattern. Using a VWAP trendline and VWAP cross can help a technical analyst
to detect price movement in securities that may not yet be fully factored into the
security’s short-term or long-term price.

Volume weighted average price (VWAP) and moving volume weighted average price
(MVWAP) are trading tools that can be used by all traders. However, these tools are
used most frequently by short-term traders and in algorithm-based trading programs.

MVWAP may be used by longer term traders, but VWAP only looks at one day at a
time due to its intraday calculation. Both indicators are a special type of price
average which takes into account volume; this provides a much more accurate
snapshot of the average price. The indicators also act as benchmarks for individuals
and institutions who wish to gauge if they had good execution or poor execution on
their order.

Attaining the MVWAP is quite simple after VWAP has been calculated. An MVWAP
is basically an average of the VWAP values. VWAP is only calculated per day, but
MVWAP can move from day to day because it is an average of an average. This
provides longer-term traders with a moving average volume weighted price.

If a trader wanted a 10-period MVWAP, they would simply wait for the first 10 periods
to elapse, then average the first 10 VWAP calculations. This would provide the trader
with the MVWAP that starts being plotted at period 10. To continue getting the
MVWAP calculation, average the most recent 10 VWAP figures, include a new a
VWAP from the most recent period and drop the VWAP from 11 periods earlier.

While understanding the indicators and the associated calculations is important,
charting software can do the calculations for us. On software that does not include
VWAP or MVWAP, it may still be possible to program the indicator into the software
using the calculations we’ve just mentioned.

There are a few major differences between the indicators which need to be
understood.

VWAP will provide a running total throughout the day. Thus, the final value of the day
is the volume-weighted average price for the day.
MVWAP on the other hand will provide an average of the number of VWAP
calculations to analyze. This means there is no final value for MVWAP as it can run
fluidly from one day to the next, providing an average of the VWAP value over time.

This makes the MVWAP much more customizable. It can be tailored to suit specific
needs. It can also be made much more responsive to market moves for short-term
trades and strategies or it can smooth out market noise if a longer period is chosen.

VWAP provides valuable information to buy-and-hold traders, especially post
execution (or end of day). It lets the trader know if they received a
better-than-average price that day or a worse price. MVWAP does not necessarily
provide this same information.

VWAP will start fresh every day. Volume is heavy in the first period after the markets
open; therefore, this action usually weighs heavily into the VWAP calculation.
MVWAP can be carried from day to day, as it will always average the most recent
periods (10 for example), is less susceptible to any individual period, and becomes
progressively less so the more periods that are averaged.

In the final analysis, MVWAP and VWAP are useful indicators that have some
differences between them. MVWAP can be customized and provides a value which
transitions from day to day. VWAP, on the other hand, provides the volume average
price of the day, but will start fresh each day. MVWAP can be used to smooth data
and reduce market noise, or tweaked to be more responsive to price changes. If a
trader sells above the daily VWAP, he gets a better than average sale price. If he
buys below the VWAP, he gets a better than average purchase price. On trending
days, attempting to capture pullbacks toward the VWAP and MVWAP can produce a
profitable result if the trend continues.