In the discussion about
VWAP in
Part II, we introduced the concept of
skew, a measure of how the volume distibution deviates from a symmetric or normal distribution. The sign of the
skew allowed a new trader to decide in which direction he/she should look for a trade setup. Positive
skew meant look for long trades only. Negative
skew meant look for short trades only. We have yet to consider trading aspects in markets with symmetric distributions. Like breakout trades discussed in
part VII, trading symmetric distibutions is an advanced concept. Not for newbies to be dabbling in.
A symmetric distribution is one in which the
skew is very small or zero
Skew = (VWAP-PVP)/SD ~= 0.
There are a number of implications of this definition as follows:
1)a small
skew means the
VWAP is close to or equal to the
PVP
2)Given a small or zero
skew, it means that price action has moved across the
VWAP at least once, otherwise the volume distibution could not be symmetric.
Now comes the kicker:
3)If the distribution is to remain symmetric, it must continue to oscillate across the
PVP and hence the
VWAP.
This implies trades of the following type:
If price moves to the 1st or 2nd
SD above the
VWAP pull the trigger SHORT.
If price moves to the 1st or 2nd
SD below the
VWAP pull the trigger LONG
WOW- that's completely opposite to everything you've been told in the last seven threads. Up until now, every trade was taken moving AWAY FROM THE
VWAP. Now you have to learn to take trades moving TOWARD THE
VWAP.
To trade a symmetric distribution, everything you have learned in the preceding threads is turned upside down. To complicate the situation, the condition for a symmetric distribution is fuzzy. It's defined with
skew approximately but not necessarily 0. There is also no guarantee that it will remain small. For example, suppose the
skew is slightly positive and price action is around the 1st
SD below the
VWAP. You would look for long trades back toward the
VWAP. But it is also possible for the price action to continue on down with the
VWAP crossing the
PVP and continuing on down. Like the breakout trade, trading a symmetric distribution has to be done with great care.
By its very nature, a trade taken toward the
VWAP in a symmetric distribution is a counter trend trade. For example, when price is below the
VWAP, the trend is down as defined in Part II. If you trade toward the
VWAP then, you are taking a long entry in a down trending market.
Similarly for shorts.
Look at the first video and see if our trader can decide if the distribution is symmetric.
Symmetric YM Trade
Advice: If you want to counter trend trade in a symmetric distribution, use the Shapiro Effect discussed in
post 16541 to decide on the entry. If the countertrend trade is taken at the 1st
SD below the
VWAP and the trade fails (price action drops below the 1st
SD) you have two choices. 1)reverse the trade and take your profit at the 2nd
SD or 2) hang on and scale in at the 2nd
SD for the counter trend move back to the 1st
SD.
Our trader in the first video was so sure that he would not want to take a short trade. But now watch the second video and see what our trader thinks now.
In the second video, our trader takes 3 trades, the first a standard breakout from the
PVP area as discussed in
Part VII, the second a counter trend trade, and the third in the trend direction after a retrace. The last two trades demonstrate the use of the Shapiro Effect when the distribution is symmetric.
NQsymmetric trades
Clearly trading symmetric distributions is as difficult as trading breakouts. The choices can be quite contradictory.