Vwap options trading

What is VWAP?

It doesn't get any easier than that! Off Your First Year! It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, options contract, transaction or other financial instrument or strategy is suitable for any person. Trading securities can involve high risk and the potential for total loss of any funds invested.

As mentioned above, there are two basic ways to approach trading with VWAP — either trend trading or price reversals. Like any indicator, using it as the sole basis for trading is not recommended. Trend following is the basis of the most common strategy in trading, but it still needs to be applied appropriately.

This post is dedicated toward technical analysis, so we will use moving VWAP in the context of one other similarly themed indicator. Since the moving VWAP line is positively sloped throughout, we are biased toward long trades only. These come when the derivative oscillator comes above zero, and are closed out when it runs below zero. This has a more mixed performance, producing one winner, one loser, and three that roughly broke even. Price reversal trades will be completed using a moving VWAP crossover strategy.

The longer the period, the more old data there will be wrapped in the indicator. We want to minimize this in order to catch reversals as early as possible, so we want to shorten the period.

To obtain an indication of when price may be becoming stretched, we can pair it with another price reversal indicator, such as the envelope channel. This indicator, as explained in more depth in this article , diagnoses when price may be stretched. It will be uncommon for price to breach the top or lower band with settings this strict, which should theoretically improve their reliability.

Uses of VWAP and Moving VWAP

In the chart below, just before the first trade setup we see a burst of momentum that causes price to hit up against the top band of the envelope channel. Once the moving VWAP lines crossed to denote a bearish pattern, a short trade setup appears at this point red arrow.

This leads to a trade exit white arrow. Later we see the same situation. Price moves up and runs through the top band of the envelope channel. VWAP is an average and like any indicators employing averages, this too lags the current market price 3.

VWAP is used for 2 main reasons — to get a sense of intraday direction and to get a sense of the efficiency of order execution 4. If the current price is below VWAP, then the general opinion is that the intraday trend is down 5. If the current price is above VWAP, then the general opinion is that the stock is trending higher 6. If the VWAP lies in between the high and low, then the expectation is that the stock will remain volatile 7.

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If you intend to short a stock, then it is considered an efficient fill if you short the stock at a price higher than VWAP 8.