Most of you day traders already know that VWAP stands for volume weighted average price. You are using it for short term trades (Scalps) as well as for targets (Exits). The so-called big institutions like banks and hedge funds also use it in their automated trading programs. So what makes it a secret weapon?
VWAP is mostly used as a benchmark to decide the price at which a currency pair can be bought or sold. The most used logic is that you buy a currency at a price lower than VWAP and vice versa. However, there are other day trading strategies that are built around this wonderful tool.
1. The VWAP Pullback Entry
This strategy is mostly used by Scalpers and other aggressive market participants. It involves watching the price action as we approach VWAP. The first thing you want to do is to look out for Order Flow patterns then taking the trade in the direction of strength. The second is you read the tape as prices approach VWAP. Now for the second approach, it is more of an art than a science and requires you to practice a lot on how to read the tape (Time and Sales). Here is an example of a powerful order flow pattern at VWAP.
6E Futures – EURUSD spot
2. The VWAP Breakout Entry
This approach is used by risk-averse day traders. The goal is to catch a breakout off VWAP for maximum profit with a very limited downside. Here is an example.
6B Futures – GBPUSD spot
These two strategies discussed are enough to make you decent pips on any given day. VWAP is a wonderful tool to have as a day trader. You, however, need the footprint chart in order to time your entries to perfection. It is important that you trade what you see and not what you think. When price pulls back, watch the order flow. If you still lost and cannot trade consistently using these tools enroll for my online course. Have a great trading week 😉