Skip to main content

How To Use VWAP In The Trend


The current market development is pretty crazy. The average daily volatility has risen dramatically and there are strong trends everywhere.
In today’s article, I would like to show you how to use VWAP indicator to trade in trends like that.

Let’s talk pullbacks!

When there is a trend then in my experience it is best to trade pullbacks. This means that you don’t just blindly enter a long or a short position but you wait for the pullback. Strong and “healthy” trends need to make pullbacks. If the price just shoots one way then there is no time to enter big trading positions (which the big guys need!).
For this reason, when there is a trend we need pullbacks. Now the big question is this: Pullbacks to where? There are two options for this and you can combine them and use them together.
First option is pullbacks to significant Volume Clusters which you identify using the Volume Profile tool. The second option is to use VWAP and it’s deviations.
You will usually have more trading opportunities when you trade pullbacks to the VWAP deviations then to Volume Clusters. So today, I will focus on pullbacks to the VWAP deviations.

Pullbacks to VWAP 1st Deviation

What you want to see first is a trend. In the two examples which I have for you today, there are strong downtrends. So, let’s talk about the downtrend scenario, okay?
When you see a downtrend then you need the price to move below the 1st VWAP deviation. That’s the grey indicator line. This line works as a Resistance. Whenever the price hits it from below, you can expect a selling reaction.
So, when there is a trend the easiest setup is just to trade pullbacks to this 1st VWAP deviation. Like in the picture below.
EUR/USD, 60 Minute chart; Weekly VWAP:
As you can see in the picture above, there were nine nice short trade opportunities. All based just on this simple pullback strategy!

VWAP + Volume Profile combination

Another way how to trade pullbacks is to combine VWAP with Volume Profile. I talked about this also in my yesterday’s article here:
How To Get The Best From VWAP
With this method you want to trade pullbacks to places where 1st VWAP deviation meets heavy Volume Cluster. This combination gives you the luxury of one trading strategy confirming the other one. When there is a trend and you really want to get in, then you won’t always have this luxury of having this double confirmation. But sometimes you do and those trades are REALLY worth it!
If you look at the picture below you can see that in this case there were not only pullbacks to the 1st VWAP deviation, but those places were also supported by heavy Volume Clusters. This is the kind of confirmation I am talking about!
AUD/USD, 60 Minute chart; Weekly VWAP:

Adjust to high volatility

With trading conditions like these (high volatility, news coming up often, markets getting crazy,…) you absolutely need to adjust to such severe trading conditions.
What does that mean? The most crucial adjustments are these: First, use wider Stop Loss and Profit Target. Way wider! At least double the usual.
Second, lower volumes of your trading positions. There is no bravery in trading big money in crazy situation like this! Don’t feel bad for trading with smaller positions. I am talking for example 3-4 times smaller positions than usual. So if your standard trade size is 1 lot, then now 0.25 should be just fine!
Third (this is REALLY important!), close all your trades before the Weekend! In situation like this you can expect big opening gaps on Monday open. Being caught in a big gap with a trade open could mean blowing up your trading account!
I hope you guys liked this article. Let me know what you think in the comments below!
Stay safe and happy trading!
-Dale

Comments

Popular posts from this blog

5 Character Traits of a Successful Trader – Tips & Tricks of the Pros!

 Maybe you are interested in trading, and you have taken the first step by researching on forex trading. You might also be currently trading but going through a tough time with your results in the markets and dealing with the recurrent autosuggestion, telling you how this journey might not be for you or you are not capable of achieving successes in this journey. It is essential to know that you are not alone in this feeling, and before you fall into the rabbit hole of depression, feeling like a failure in yet another skill you have chosen. Let me make it clear; the answer is YES, anyone can achieve success in trading , including you. It would only cost you a few character trait adjustments. Before we delve in, it is vital to point out that success i...

How To Trade The Point Of Control (POC)

DEFINITION: Point Of Control (= POC) is a price level at which the heaviest volumes were traded. The most important thing that the Volume Profile indicator shows is the POC. I dare say that if you used Volume Profile only for the purpose of identifying the POC, you would be a way better and trader then 99% of the retail traders. No matter what trading strategy you trade. Why do I say this? Why is POC so important? Point Of Control is so important because it shows the place where the most trading took place – where the biggest trading positions were accumulated. POC shows the BIG guys! Who accumulates those huge trading positions? The BIG guys – that’s the big financial institutions like hedge funds, pension funds, huge banks, etc… It is those BIG guys who move and manipulate the markets. It would be a huge advantage to know where they placed most of their positions, right? The good news is th...

Beginners Guide to Order Flow PART 1: What Is Order Flow?

DEFINITION: Order Flow is an advanced charting software which enables you to read all trading orders that are processed in the market. It helps to track the BIG financial institutions through the trades they make. Most people get confused when they open up a chart with Order Flow for the first time. There is no shame in that. Order Flow shows so many information and it is easy to get overwhelmed and confused if you don’t know what to look for! This Beginners Guide will teach you how to understand how Order Flow works and how you can use it in your trading! In this 1st part of the Order Flow Guide I will show you around the Order Flow interface. Footprints The Order Flow does not show standard candles, but it shows FOOTPRINTS . A footprint shows not only Open, High, Low, Close (as standard candles) but it also shows orders traded in that candle. Orders can be...