The VWAP in Multiple Timeframes

In a webinar hosted by NinjaTrader, we discussed on one of our most popular premium tools, the Volume Weighted Average Price (VWAP) and how to use it in multiple timeframes. By anchoring the indicator to the daily, weekly and monthly open, one can define price action zones where institutional investors are likely to participate. This in turn, can be used to identify momentum and early trend retracement setups. To learn more, watch the webinar recording or continue reading below:

Webinar Recording: Institutional Price Action Zones

The Institutional Price Action Zone

There are two main reasons why the VWAP is important for institutional traders. First, it is a price benchmark used to control execution cost. For one, institutional traders don’t want to move the markets as they enter large positions, so they have to find the area where the majority of the day’s, week’s or month’s transactions are likely to occur. Statistically, 70% of all transactions during the session will take place within one standard deviation of the VWAP. That is what‘s referred to as fair value. Therefore, institutional traders are looking to execute as close as possible to the VWAP where they‘ll find plenty of supply / demand.

Secondly, the VWAP is also a factor in performance reviews. Good execution can be objectively measured by standard deviations from the VWAP. That means that better execution than the VWAP will result in a higher bonus payout.

Current Session VWAP Value

Fair value refers to prices that are within one standard deviation of the VWAP. Because institutional traders are looking to execute within that area we can use that information to identify setups that are likely to see some movement. The idea is to look for retracements back towards the value area, going from inside the value area, towards the outer standard deviation bands.

Daily VWAP anchored at RTH open

Once prices move towards the outer standard deviation bands, institutional traders are likely to take a step back and we’re likely to see rebalancing. These are overbought scenarios and can be used as exit points for directional trades.

Our VWAP indicators also come with mid-standard deviation bands (0.5, 1.5, 2.5). Mid-bands are particularly useful for higher timeframes where the regular standard deviation bands are further apart from one another. Throughout the higher timeframe sessions, it is not uncommon to see these levels work as dynamic support / resistance levels.

Prior VWAP Value

The indicators included in our premium suite also plot the prior value area high and low points. Some of the best short-term setups are found when prices move out of the prior session’s value area. If the market moves out of the prior value area we’re likely to see a trending move. However, if the market trades out of the prior value and then fails to follow through, we may be looking at reversal scenario.

Prior VWAP and Standard Deviations

Finally, the indicators come with the option to plot the VWAP levels set 2 and 3 sessions ago. Prior VWAP levels are important key S/R levels and this is mainly due to the fact that some of the large institutional positions will take days to fill. It is therefore easy to imagine how these levels can used as opportunities to get in or out of trades.

Anchored VWAPs: Daily, Weekly, Monthly and N-Monthly

The Weekly VWAP for NinjaTrader 7 and 8

The daily VWAP is anchored at the ETH, RTH or at a custom session starting point. The indicator then plots the volume weighted arithmetical mean of all transactions taking place during the daily session. Prices for every transaction are added and divided by the total contracts traded during that time.

The session start for higher timeframe VWAPs, i.e. for the week, month or a N-month period, is the first trading day of those sessions. The current week, month and N-month VWAP are therefore identical to the daily VWAP at the start of their sessions. For the weekly calculation, one should wait until the 2nd daily session in order for it to deliver meaningful information about the current week’s VWAP levels. Likewise, until the second week of the month, a monthly VWAP will render the same information as the current week VWAP. Therefore, in order to create a reading at the outset of these sessions we’ve therefore created a Rolling VWAP that can be set to calculate continually weekly / monthly / quarterly / yearly VWAPs.

The Rolling VWAP

Although higher timeframe VWAPs contain valuable trend, value and oversold/overbought information, they have a certain drawback. Specifically, they are anchored at the start of the week, month and N-month session and are therefore at the outset identical to the daily VWAP. For the weekly calculation, one should therefore wait at least 2 days in order for it to deliver meaningful information about the current week’s VWAP. Likewise, until the second week of the month, a monthly VWAP will render the same information as the current week VWAP. In order to create a reading at the outset of these sessions we’ve therefore created a rolling VWAP. It can be set to continually calculate weekly, monthly and N-monthly VWAPs.

The Rolling VWAP is not anchored at the beginning of week session but taking data from the previous session, moving it forwards. By using a rolling period of 5 days, one can then create a moving weekly VWAP calculation and have an accurate reading at the outset of the week. By using a rolling period of 21 days, one can create a moving monthly VWAP calculation at the start of the month.

The Rolling VWAP for NinjaTrader 7 and 8

Entry Timing and Stop Loss

During the presentation we also had a look at how to identify trend setups using one of our tools for entry timing, the Zerolag Oscillator together with the VWAP. The Zerolag Oscillator was developed to identify momentum and early trend retracements, identifying setups when there’s a trend change or short term over sold/bought. In a long scenario, a short term oversold is indicated by white bars.

If buyers are taking advantage of these short term lower prices, the Zerolag Oscillator will outline possible retracement entries. Key retracement signals are indicated by the letter K and show the first retracement in a new trend. Secondary retracements, preceding a key retracement, are indicated by the letter R. Momentum signals are indicated by the letter M and will plot when the zeroline of the oscillator has recently crossed with sufficient price movement, breaking the recent consolidation high/low level.

Daily VWAP long momentum and retracement entries

In a short scenario, a short term overbought is indicated by yellow bars and if sellers are taking advantage of these short term higher prices, possible short retracement entries will appear. The stop loss for these setups are located just a few ticks below or above the setup bar or the signal bar whichever has the lowest low or the highest high. The stop loss for momentum signals can be placed right below or above the signal bar, alternatively below the low / above the high of the prior consolidation area.

Daily VWAP short momentum and retracement entries

The Overnight Range and Profit Targets

As for identifying targets, we also looked at the overnight range because it defines most recent high/low levels. Most major future markets are traded around the clock and the high and lows of the night session will set the tone for much of the collective reasoning and psychology in the markets. Therefore, price levels from the Asian and EU sessions will often work as important support /resistance levels during the US regular session and one should therefore be able to access these price points.

Expansion bands from this range can also work as reliable profit targets and our premium Opening Range indicator can for example plot the 50%, 100% and 200% extensions. The 50% extension will then equal half the overnight range, the 100% extension the entire range and the 200% extension two times the overnight range.

Using overnight range extension bands for targets

This approach for target definition is particularly useful in situations when the standard deviation bands are contracted because of a narrow overnight range. In those scenarios, prices will move beyond the outer standard deviation bands fairly quickly whereas the overnight expansion bands will give a clear measure of how far the move might go.

Conclusion:

The above discussed features of the VWAP indicator can help identify price benchmarks that institutional traders use to define value, overbought / oversold and dynamic support resistance levels. Applying the Zerolag Oscillator one can then time the entries around these levels whereas the Opening Range is used to define possible profit targets.

To register for a free trial of our indicators, visit this link. During the trial we’re also available to schedule a call and discuss how the indicators may be applied to your trading approach.

Finally, to view another presentation on using our indicators in multiple timeframes, visit this link.