Trading with Market Statistics III. Basics of VWAP Trading

[jperl 10]

In this thread, we will present several videos to demonstrate how to use the volume distribution function and its associated Peak Volume Price (PVP) and its Volume Weighted Average Price (VWAP) as a trading tool. This thread will concentrate on entries and stops only for new traders. Our trader for this is named NEWBIE. We will show how NEWBIE should use the relationship between the PVP discussed in [thread=1962]Part I[/thread] and the VWAP discussed in [thread=1990]Part II[/thread] to determine a) the region of the price action where he could be trading, b)the direction of his trade (long or short) and c)a possible entry point for the trade.

 

So lets get started. Below is the first video. We have a very raw newbie, who knows nothing about market statistics. He's trading the Emini Russell 2000 index futures by the seat of his pants. He thinks he knows the market direction from the premarket open and the first half hour of trading. He's heard something about trend lines and "The Trend is your Friend" , so he enters a long trade, sets a profit target and a stop loss. Watch the video and see what happens. If you are a newbie yourself, see if you recognize any of NEWBIE's traits in yourself. The video ends with a short discussion of what NEWBIE could have done if he had used market statistics instead of the seat of his pants.

 

 

Enjoy,

JERRY

Newbies First Trade.swf

Edited March 7, 2008 by jperl
Stored video in our server.

[Guest cooter]

NOTE: To view this video you will have to go through some contortions to get to it as follows:

a)click on the link below

b)enter the code shown on the Megaupload page in the space provided

c)wait 25 seconds, when the count down completes, click on free download

d)your browser will download the file, after which you should be able to view it. If you don't see it, make sure your browser is not blocking popup windows for the megaupload site.

NEWBIE'S FIRST TRADE

 

Enjoy,

JERRY

 

Sorry, but few of us will download an executable file ending in .exe.

 

You can go to filefront.com and upload your full video file there instead.

 

Thanks.

[Soultrader 12]

Hi Jerry,

 

Im going to download it and upload it into my server so it stays permanent. Then I will edit your post to include the server url instead. Thanks

 

Update: I posted the direct link to the file. However, as Cooter mentioned it would be best to save it in a format other than .exe. Perhaps .swf or .avi would work. EXE files are known to contain viruses so users may not want to download the file. I have scanned the file and has absolutely no problems but it would be great if you could re-upload it for security reasons. Thanks Jerry.

[scoter 10]

hello jerry I have a lot appreciated yours post, they are much instructive but unfortunately I am Italian and I do not understand English spoken. You can make a post with reassuming of the video that I have seen? thanks.

[jperl 10]

Here is a swf version of the video for those of you who do not wish to download an exe file. Thanks to cooter for the filefront.com recommendation.

 

http://www.traderslaboratory.com/Trading%20Videos/Newbies_First_Trade.swf

 

JERRY

[jperl 10]

NEWBIE is now ready to take trading a little more seriously. After a minor disaster trading with the trend and getting stopped out, he's decided to look at the "Trading with Market Statistics" Threads and has read [thread=1962]Part I[/thread] and [thread=1990]Part II[/thread] at least a half a dozen times. He doesn't know much about statistics but he is willing to learn if it will help him with his trading.

 

What he has learned so far or at least should have learned is that market direction is reflected in the relation of price to the VWAP AND the relation of the VWAP to the PVP. Market data is skewed to the upside when the VWAP is above the PVP, skewed to the downside when VWAP is less than the PVP and symmetric when VWAP ~= PVP.

 

NEWBIE should be trading only in the high volume region of the price action

so for NEWBIE to enter a trade, the following conditions should prevail:

 

Long Entry:

 

VWAP > PVP and price action above the VWAP

 

Short Entry:

 

VWAP< PVP and price action below VWAP

 

No Trade:

 

VWAP~= PVP

 

NEWBIE is going to embed this in his brain so that it becomes second nature.

 

Download the following video and see how NEWBIE fairs by following market statistics. (attached)

 

In the next thread, [thread=2101]part IV,[/thread] our newbie will learn about other points where he can trade

ER2VWAPTrade.swf

Edited February 19, 2009 by Soultrader

[Nvesta81 10]

Nice Videos.

 

I'm a newbie, so I will ask my newbie question. Regarding ...

 

Short entry :

VWAP< PVP and price action below VWAP

 

What would you consider doing when VWAP is below PVP and price action is above PVP and thus above VWAP as well? On the chart I am looking at now VWAP is slightly below PVP but price action is quite above PVP, is this still considered a short entry?

 

If I must post a pic of the chart I will but I'm hoping you can answer this one fairly easy as you are clearly not a newbie.

[jperl 10]

What would you consider doing when VWAP is below PVP and price action is above PVP and thus above VWAP as well? On the chart I am looking at now VWAP is slightly below PVP but price action is quite above PVP, is this still considered a short entry?

 

 

Unleashed---good question. If you looked at the first video in this thread, you saw exactly that situation. If you are a newbie, you stand aside. Do nothing. In that video, NEWBIE took a long trade based on perceived market trend and was stopped out. Trading in the low volume region is dangerous and requires more advanced analysis. We'll get to that in future threads.

In your chart, from what you describe, it sounds like VWAP ~= PVP. Again do nothing.

 

It's imperative that you understand the logic of the basic VWAP trade. It forms the foundation of everything that is to follow.

 

JERRY

[Nick1984 10]

Liked your first vid. One question now that your uploading on filefront...how do i watch the new one?

[jperl 10]

Liked your first vid. One question now that your uploading on filefront...how do i watch the new one?

 

Click on the link which will take you to filefront. Then click on download, which will download the file to your computer. If you get a message that says something like "Windows can't open this file", it should give you choices of what software to use to open it. Just choose your browser, either IE or Firefox to open it.

Any problems, let me know. (Soultrader is working on ways to make this easier)

 

JERRY

[dupaski 10]

Trading in the low volume region is dangerous and requires more advanced analysis.

 

From a MP perspective when price trades into the low volume wouldn't we would want to trade as price is potientially looking to establish a new value area and potientially starting to trend ?

 

I like your approach using VWAP however is seems to be most benefical in establishing a bias. I also think it would keep you out of trend days like yesterday as there was no substancial reversion to a mean, just a steady climb throughout the day. Would you mind going over how VWAP and PTP looked during yesterdays action (7/12)?

 

Thanks for shaing this with us.

 

-DT

[jperl 10]

From a MP perspective when price trades into the low volume wouldn't we would want to trade as price is potientially looking to establish a new value area and potientially starting to trend ?

HI Dupaski,

If you are a newbie, the answer is no. If you are an advanced trader, the answer is yes. You have to learn how to crawl first before you can walk. We will get to trading in the low volume zone in later threads.

 

I like your approach using VWAP however is seems to be most benefical in establishing a bias. I also think it would keep you out of trend days like yesterday as there was no substancial reversion to a mean, just a steady climb throughout the day. Would you mind going over how VWAP and PTP looked during yesterdays action (7/12)?

 

 

Slow creep upward price action is difficult to trade under any circumstances. I actually traded yesterdays ER2 action. Took about 4 trades.

Reversion to the mean (VWAP) doesn't occur all that frequently. You will have to wait until we talk about reversions to the Standard Deviation. Stay tuned.

 

JERRY

[Nick1984 10]

Good video Jerry, finally got it working! I like how noobie is learning lol.

[Dogpile 10]

I am trying to understand the logic here. the VWAP is a very logical. the PVP seems irrelevant to me. why is the PVP a meaningful number? seems like a marginal difference as to what it might be at any given time...

 

btw, if newbie were a pattern guy, he could have gone long off the A-B-C corrective pattern down (a lower low) pattern that lead to a re-test of the morning high.

[jperl 10]

I am trying to understand the logic here. the VWAP is a very logical. the PVP seems irrelevant to me. why is the PVP a meaningful number? seems like a marginal difference as to what it might be at any given time...

 

As we will see later, the PVP is one example of a hold up price, HUP for short, prices where the market slows or reverses. More importantly for NEWBIE now, its the relationship between PVP and VWAP that is important for determining market skewness. When PVP and VWAP are close together, there is no skew. Volume distribution is then symmetric about the mean ( VWAP ). It's when they are further apart producing a market skew that things get interesting.

 

btw, if newbie were a pattern guy, he could have gone long off the A-B-C corrective pattern down (a lower low) pattern that lead to a re-test of the morning high.

 

Yes he could have taken a long earlier...but again he's going to have to wait until later threads to understand why that would have worked using market statistics.

[Nvesta81 10]

Just wanted to say that I really appreciate you doing these videos, Jperl -that goes to SoulTrader as well for his videos...

 

My gratitude to you both, they are very helpful to new traders like me. I hope some day I can return the favor.

[jperl 10]

Just wanted to say that I really appreciate you doing these videos, Jperl -that goes to SoulTrader as well for his videos...

 

My gratitude to you both, they are very helpful to new traders like me. I hope some day I can return the favor.

 

Glad you like them Unleashed. Stay tuned, there is more to come. We've only scratched the surface.

[jperl 10]

NEWBIE wants to test his new found trading knowledge for other contracts besides the emini Russell 200. In this video he trades the Emini S&P500 for July 9, 2007. As usual, NEWBIE trades shorts when price action is below the VWAP AND the VWAP < PVP. So follow along as NEWBIE takes this ES short trade.

ESshort.swf

[thrunner 10]

Thank you for sharing, Jerry. For those having problems playing swf files automatically or wish to have some controls over the playback, you should try these freeware (small 600K downloads):

swf player: http://www.browsertools.net/downloads/SWFOpenerSetup.exe

less features player: http://www.globfx.com/downloads/swfplayer/

BTW, Jerry, for those wishing to replicate some of your studies, are you using Ensign software charting and wrote your own VWAP and PVP functions? and are those available somewhere? Thanks.

[jperl 10]

Thank you for sharing, Jerry. For those having problems playing swf files automatically or wish to have some controls over the playback, you should try these freeware (small 600K downloads):

swf player: http://www.browsertools.net/downloads/SWFOpenerSetup.exe

less features player: http://www.globfx.com/downloads/swfplayer/

THanks thrunner, I figured there had to be something out there to control swf playbacks. Very useful.

BTW, Jerry, for those wishing to replicate some of your studies, are you using Ensign software charting and wrote your own VWAP and PVP functions? and are those available somewhere? Thanks.

Yes, I use ensign software and wrote my own software for the VWAP. However, ensign does offer a Design Your Own template to download for computing VWAP.

[Guest cooter]

Thank you for sharing, Jerry. For those having problems playing swf files automatically or wish to have some controls over the playback, you should try these freeware (small 600K downloads):

swf player: http://www.browsertools.net/downloads/SWFOpenerSetup.exe

less features player: http://www.globfx.com/downloads/swfplayer/

 

Don't use untrusted software.

 

Try Apple Quicktime here:

 

http://www.apple.com/quicktime/download/

 

It runs .swf files without any problem.

 

P.S. Get the version without ITunes - you need the standalone QuickTime player for this to work properly.

[brownsfan019 17]

NEWBIE wants to test his new found trading knowledge for other contracts besides the emini Russell 200. In this video he trades the Emini S&P500 for July 9, 2007. As usual, NEWBIE trades shorts when price action is below the VWAP AND the VWAP < PVP. So follow along as NEWBIE takes this ES short trade.

 

Jerry,

First, just want to say WOW on these threads. If I was new to trading, you would have my attention! Great job!

 

One observation on the ES video - to assume any fills when price just touches, esp for a newbie trading a 1 lot, is not realistic. Price needs to trade through the entry and exit level to expect a real-time fill. The ES is too thick for price to be touched and assume a fill.

 

Just an FYI for anyone running the examples on the ES. An MIT order would eliminate that (but also create smaller profit targets).

[thrunner 10]

Don't use untrusted software.

Try Apple Quicktime here:

http://www.apple.com/quicktime/download/

It runs .swf files without any problem.

P.S. Get the version without ITunes - you need the standalone QuickTime player for this to work properly.

Well, QuickTime is a 20MB bloatware download that phones home at all times (check your firewall) and shows advertisements whether you want it or not by default on opening (hint: turn off player content guide). Adding insult to injury, QT (7.0.3) w iTunes doesn't play swf properly- the player slider time index is wrong and it will no longer play with sound after you slide the play past the end and then return slide to the beginning. As stated above, you'll need the standalone QT to work properly. Quicktime is truly beginning to be worst and more annoying than Microsoft media player.

There is an opensource Flash player but unfortunately it is in alpha. The two swf players posted previously are from two independent but well established houses and they are free, small (600KB), no ads, doesn't phone home. They are basically simple wrappers around the Adobe Flash.ocx. No, I have no association with either firms and I have no position in Apple stocks either.:p

[Guest cooter]

Well, QuickTime is a 20MB bloatware download that phones home at all times (check your firewall) and shows advertisements whether you want it or not by default on opening (hint: turn off player content guide). Adding insult to injury, QT (7.0.3) w iTunes doesn't play swf properly- the player slider time index is wrong and it will no longer play with sound after you slide the play past the end and then return slide to the beginning. As stated above, you'll need the standalone QT to work properly. Quicktime is truly beginning to be worst and more annoying than Microsoft media player.

 

Yes, the standalone Quicktime player from Apple is what users should download, as I specifically advised that the version with ITunes software would not play .swf Flash files properly.

[Dogpile 10]

jperl,

 

ok, thx for PVP explanation re. skewness -- that makes sense. I see what you are doing now with PVP. You are assuming that the PVP was an earlier point of 'balance' and that monitoring VWAP relative to PVP will keep you on the right side of a directional move as price diverges away from the earlier established 'balancing point.' This is an interesting specific strategy variation on classic market profile.

 

I clearly see why this could be a very useful visual reminder for traders on how to bias their trades. This is really particularly applicable to the afternoon session where the market has more 'trendiness' than the morning session.