Last Updated:

ES 06-18 / 03. May 2018

wtl
wtl Daily Digest

Traded volume was 2.079.784 according CME settlement data. 

More numbers and data tomorrow. It will be interesting to see where we close the week.

Trading around VWAP

Question from Jason: 

A lot of times price reverses at VWAP without any a large floor or ceiling so finding an entry becomes a little difficult. In this image there is a ceiling at 2676.50 after price was rejected at the VWAP. And there is a potential short around 2775.00. But, I feel like I am chasing the trade at that level. The ideal entry would be around 2777 but there is no ceiling. What is the best way to handle this set up?

I must admit that I can't answer this questions satisfactorily but I would rely on following facts:

Most VWAP trading strategies are simple and relatively quick to execute. All broker-dealers possess some form of algorithms run on computers to assist them or to trade automatically. 

The most professional brokerage firms offer what is known as "Guaranteed VWAP" execution to large institutional clients. Guaranteed VWAP is the process of executing trades exactly at the VWAP price.

The second option offered by brokers is VWAP target execution where the broker makes a best effort to execute near the VWAP without guarantees. 

It is much easier to answer the ideal situation how to handle these setups, shown in first screenshot above: 

Price is heading towards VWAP and good liquidity is indicated on the offer side of the Limit Order Book. 

Following indications stands for a high probability setup:

  • High Liquidity on the Offer (400-500 contracts) at 2609.50 - 2610.00 
  • VWAP 2609.50 within liquidity area
  • High volume sold before touching VWAP area
  • Liquidity absorbed smaller buying volume (divergences) 
  • Liquidity was placed twice after price hit 2610.00 - closed the "ceiling"

This setup was base for a nice short, as tweeted, from 2609.75 to 2601, when liquidity starts to build again on the bid side. 

Conclusion

Nothing is guaranteed in trading but VWAP is one of the non-lagging indicators with a very high functional probability. 

As a volume-weighted price measure, VWAP reflects price levels weighted by volume. This can help institutions with large orders. The idea is not to disrupt the market when entering large buy or sell orders. VWAP helps these institutions determine the liquid and iliquid price points for a specific security over a very short time period.

The Reason why VWAP became such an important tool in trading today relates to one factor:

Simplicity! VWAP’s enduring appeal lies in its ease of calculation, understanding, implementation and attainability and it is a non-lagging indicator. 

Place your thoughts how you use VWAP in the comments below. 

Thanks Jason!

Comments