Trading Stocks with Volume Weighted Average Price (VWAP) | Technically Speaking: Advanced Charting
go [Music] good afternoon and welcome everyone my name is cameron may it's two o'clock eastern standard time on a friday afternoon and that means that it's time to get back to but get back to the ongoing series of discussions called advanced charting techniques i'm filling in for pat malawi he'll be back again next week but i'm looking very much forward to today's discussion i think we have a great topic today when we're learning about a new technical indicator on a chart i think it's very natural for a trader to ask themselves i wonder if those big guys the big money managers the mutual funds the hedge funds the pension funds do they use this indicator well with some indicators maybe or maybe not the one that we're talking about today yes a lot of them do it's this is known as the volume weighted average price that we're going to be discussing today it's abbreviated to vw ap or vwep i'd like to know uh for those that are already attending who have actually used this indicator before if you'd like to chat and let me know just like to gauge uh my audience uh my audience's level of of familiarity with that indicator all right but i'm looking forward to it we'll set a more precise agenda for that in just a moment but let me first of all say hello to everybody that's chatting in from all around the country we have vj krishna juanita josu sandy tmtm who wants us there crispy wayne grace brad paul wrong um lou seattle michelle remy oda on and on that list goes willow puff betty charles thanks for being here week after week we definitely appreciate your continuing attendance your contribution your support if you're here for the very first time though i'd like to welcome you as well if you want to chat and let me know this is your first time in one of these webcasts i always like to see who the new audience members are and if you're watching on the youtube archive after the fact enjoy the presentation but be aware that you're invited to join us in the live webcast kicks off at two o'clock eastern standard time on friday afternoons typically hosted by pat molly i'm standing in for pat today all right and a final note this is a great pleasure to have on board with us hanging out in the chats brett crowther brett uh is a coaching manager stepping in because we're a little bit light on staff today a lot of people taking time off and this is the way we do things we back each other up good to have brett here i've worked with brett for almost 20 years so he he definitely knows what's going on around around these parts so he's going to answer any questions that i can't get to in the chats but let's get right to it let's kick things off as we always do i want to first of all issue you an invitation if you're not following me on twitter there's my twitter handle at cma underscore tda twitter is the best place to have a more personal one-on-one interaction with your coaches so if you're not following us please do also remember that risk is real um this is important information to bear in mind content we're about to provide is intended for educational informational purposes only it's not investment advice or recommendation of any security strategy or account type options are not suitable for all investors special risk inheritance options trading may expose investors to potentially wrap in a substantial losses any investment decision you make in your self-directed account is solely your responsibility having success with your paper money funds and funds is not a guarantee that you're going to have success with your real accounts because market conditions do change and they can change rapidly while this webcast discusses technical analysis other approaches including fundamental analysis may assert very different views and all investing involves risks including the risk of loss all right so let's set the agenda for the day three items that i want to tackle in today's discussion number one i know that some of you are not going to be terribly familiar with vwap maybe you've never heard of it so we want to talk about what it is so on that first point i want to make sure that we show how it's constructed for some traders they like to understand how an indicator is actually built because they might even like to customize the indicator in the future it helps to understand what's sort of going on under the hood then we're going to get into how that indicator the volume weighted average price might be used by a self-directed investor in planning a stock trade all right now interestingly this is a technical indicator it's typically associated with day trading we're not going to be looking at it through the day trading lens today we're instead going to be looking at how a trader even an investor might use this indicator for the planning of a stock trade but then number three i want to make sure that we get some repetition we get to see this shown on on a number of charts recognizing a number of potential uses on a number of potential charts that repetition helps us to learn so there we go how is it built how might it be used and let's get some examples so let's go into the paper money platform we're switching over here to thinkorswim i think what we'll do first let's go ahead and load this indicator up on the chart so you know i see some of you chatting in yeah we've used v wap before others not terribly familiar with it let me show it to you we're going to go up here a little beaker icon or the flask icon that's our edit studies this will give us access to all of our studies pardon me now v v web would typically be found all the way at the bottom of menu a quick way to get there is to just type in a keyword search vw ap highlight it and we're going to add that to the chart okay now as we add this watch this i'm going to click apply and what you'll notice is a line that goes through the center of a chart and you traditional vwap users are going to say that's not what my view app looks like because we need to change our our chart time frame okay but let's go ahead and click ok and we're going to switch up here to our where it says d for day we're on a one year daily chart and as i mentioned this is typically i think it's more commonly associated with day trading i think for for some investors they might even for those that might be familiar with v web they might even think oh is that that i thought that was exclusively for day trading not necessarily so anna's saying what does vwab stand for volume weighted average price and emery that's what it stands for but i want to talk about why it's called that too okay but the first thing that i'm going to do before we do that is we're going to come up here and change the time frame let's switch our time frame to an intraday chart we're going to leave it on one day but this is traditionally used on a five minute timeline so i'm going to switch this to five minute candles and then click ok all right so now we're looking at a one day chart and now i don't very commonly use intraday charts in in my instruction so some of you might not even be familiar with these gray areas we're used to seeing just a nice white chart well these gray areas actually represent after-market trading activity so these wide areas are actually traditional market hours here in the mountains of utah that's 7 30 in the morning until 2 o'clock in the afternoon on the east coast 9 30 a.m to 4 p.m so that's the white areas the gray areas are aftermarket so and one other thing that i'll point out with these is the candles will look a little bit different they're thinner markets it's not as heavily traded so even the candles are gonna look a little bit strange on the first time we see that but i'm just gonna highlight let's let's go back here this is yesterday and this is today on a five minute by five minute basis okay let's go back to yesterday and we're going to use apple as our example all right so there we go now what you'll notice here we've added three lines by selecting that that v web however for most people who've used v app before they might say well i thought i thought view apple is just one line it is thinkorswim actually takes it a little step further and for convenience potentially adds two other lines for for potential reference points i'm going to actually take those off for now so we have this pink line up here orange line down below those are think or swim additions to a traditional v web so let's go up to the top of the chart and i'm going to click on that oh i'm going to actually pardon me let's click on the edit studies icon i got one step ahead of myself i started i was looking for the little gear icon just missed it in any case we're going to click on the little beaker icon and then come over here next to our v web study line is the little gear icon that allows us to customize these studies and we're going to remove the upper band for now we're not going to show that plot line the pink one we're also going to remove the lower bound the lower band or the orange one we're not going to show that plot line we're going to click ok click apply don't worry we're going to come back and revisit those later and then click again so what we're now left with is a traditional vwap line now just in short in brief or in summary what some institutional money managers will do is they'll use this line to represent over the course of a day where the average price is notice the name volume weighted average price and for those institutional traders that's quite important because when you're managing a lot of money just a minute just put yourself in the shoes of a big portfolio manager let me matter of fact let me really emphasize this let's suppose that you're managing a portfolio of billions of dollars okay and then you decide oh got a big apple position need to go liquidate some of that what's likely to happen with the price of apple when we go place that order of those orders to start selling those shares well it can influence the price downward and it can push that down significantly so what those institutional traders will do is on a daily basis they'll try to determine where the average price is and they'll typically try to sell when price has moved up above average on an intraday basis so if they are influencing price they're only influencing back toward its average for the day they're not exacerbating let's say it's selling and it's well below average and they're not just driving that selling price or that average that average price even further below pardon me the current price even further below average to the same extent if they're buying maybe they don't want to pile on when there's lots of buying and drive price significantly higher so it's it's a it's an effort to be efficient and and to not have too much influence on price does that make sense so therefore let's go back to our chart this average price over the course of a day can be quite important for some institutional traders that's where the institutional traders might use this line so what is this line i said it's an average price it says it in its own title well let's start to talk this through um let's let's turn back to ourselves let's say that we as a self-directed investor were thinking about buying a stock all right let me ask you a question do you typically like to buy a stock at or below average or at or above average what do you think probably try to buy if if we had our preferences right we'd like to buy when the price isn't way above average so the first thing that we need to do is determine what is average so for simplicity sake let's say that we look over the last three days and we look at day one and we see that well the closing price was forty dollars we look at day two closing price was forty one dollars day three closing price was forty five dollars so we might just do some quick math here at 40 plus 41 plus 45 that's 126 dollars divide that by three and that would tell us the average price was 42 well that's true for the closing prices for that hypothetical time period but i'm going to switch up that scenario a little bit let's say we take a little bit deeper look and we notice on day one it was actually pretty light volume let's say there were only 10 shares traded on day one okay day two also ten shares and then on day three upon closer inspection we noticed there were a hundred shares traded now if we're looking for average price we might really want to get what we're trying to determine is where is the truly the bulk of the trading and in this case where's the bulk of the action well on day one we basically had four hundred dollars of trading on day two we had 410 of trading and on day three we had five hundred dollars of trading so really truly now that we've added that uh volume to the equation with price where is average is it really close to forty two bucks which is going to make it closer to these lower prices or should it be closer to forty five dollars yeah it really should be closer to forty five dollars so did so now to determine a volume weighted average price we could just tally up these totals here and uh just doing that math quickly that should be about fifty three hundred and ten dollars of total trading that happened over the three days and then we're going to divide that by the total share quantity so that's going to be 120. and that's going to tell us really a true average including all the trading volume was about 44.25 this is probably a a closer metric if we're trying to gauge where we're buying relative to the bulk of the action so this this little equation is not exactly how v wap is constructed however it does i think illustrate the the the point of volume weighted average price so what is the actual equation well you can actually go out and google it there's an elegant little equation it's only a few um it's only uh a few characters with the numerator and denominator explaining how v wap is created i don't think it's very useful though when you see that equation you don't know what it actually means so there's actually sort of a five step a five step process in calculating this line that determines the v web so what it starts with and it starts new every single day view app is recalculated from scratch at the start of trading every single day so what we do is we look at this first five minute candle and we wait for the trading to occur candle's bouncing up and down it establishes a high bouncing up and down it establishes a low for that five minute period and then finally it closes and what we do is we find the average price for the first five minutes okay and that average price is kind of calculated this way to find the average price we take the high price of the five-minute period the low price of the five-minute period and the close of the five minute period and then we just divide that by three so we don't feel the pressure we don't have to track every single tick in price for the whole five minutes and then the next five minutes maybe there's more trading and then they have more data points to track nope we just take the high the low and the close divide that by three and that provides a serviceable average price next we take that average we multiply that we multiply this the volume or the the value in step number one by the volume for the period this five minute period okay and this generates something that's known as the pv now i have done some significant research into this cannot find an explanation for what pv stands for so my apologies i don't know what it means i've thought of it traditionally as the as the um maybe the price volume could also be the period value whatever in any case we got we calculate something known as the pv very simple calculation and then finally we divide that pv by the total volume for the day all right so as of the very first candle we're just going to calculate the average price divided by the volume for that five period uh that five minute period and then divide it by the total volume for the day which is going to be the same as the first five minutes right but that that determines the very first data point here on our vwap line and then we just repeat this process repeat for every five minute candle through the rest of the day and finally we just add each new pv to the previous pre the pv and divide by the total volume for the day let's throw a little slash in there there we go so that's it so so really this is just aggregated over time it's similar to a sim to a moving average you probably you're probably thinking well it kind of sounds it kind of ish like a moving average but clearly not exactly the same but when you're out there and you're googling how is this calculated and you see this little equation this is what's really going into this equation i wanted to go into this in some detail because they're going to be members of our audience who like to understand how indicators are built they may be they maybe even like to build their own little spreadsheets so they can generate their own indicators that's fine if you followed that fantastic if you didn't does that mean you can't use the indicator no not necessarily as long as we understand that really all of this is just generating this line and the intention of this line is to represent the just a weighted volume weighted average price for the day as we move through the day that's good enough right so now let's get into sort of how to drive this vehicle now that we've had a peak under the hood okay so let's hide this left column we don't really need that for the rest of this discussion really let's look at apple and let's suppose that you've done some research on apple i'm actually going to clear up our line up clear up this line right now let's come up here to our edit settings for just a moment i'm going to remove our vwep for a second click apply click ok and i'm going to switch our time frame back out to a one year daily chart do some basic technical analysis with me what's been happening since the first part of january well apple has been making lower highs and lower lows now for some technical or chart reading traders that is a tradable scenario maybe they maybe they've concluded you know what looks like there's a descending area of resistance let's come up here all the way up to the start pardon me voice is struggling just a little bit but we might notice that we've been stair stepping lower making a lower low rallying up to a peak down to a next lower low and maybe the trader is starting to suspect boy sorry about that starting to suspect boy is this potentially a time to get into a new bearish trade whether we're trading options or maybe we should we're just going to short the stock but we're right up against resistance so they're doing their technical analysis they're getting some getting some context over a period of weeks to months now they're zooming in on a specific day and they're thinking to themselves boy today might be the day and if today is the day to take action does that mean any time during the day or is there something that we might be able to look at on an intraday basis that may help us with that timing refine that timing potentially even a little bit further should i should i enter my trade right now or should i do it in two hours or should i done it should i turn it an hour ago that's what vwap is potentially there to offer as an aide and that that sort of scenario can apply to a trader who's trading over a period of days to weeks it might be an investor who's looking to be in a trade for months or longer because just about anyone can feel the need to try to add even just a little bit more refinement to a trade now as i set that scenario it's not a guarantee that using vwap or other any other technical indicator indicator is going to add to the quality of an entry right it's not a guarantee of performance but that's the conceptual basis or foundation for this discussion we're about to have so let's say that we're thinking of getting into a new bearish trade on b web let's talk about potential bearish entries let's talk about potential bearish exits but talk about potential bullish entries and talk about potential bullish exits so let's now switch our time frame back let me come up here let's go back to time frame go to intraday switch this back to a five minute bar and click ok and let's add our v web click on edit studies type in v web and we're going to select it add that and before we apply that with my apologies i'm going to remove those upper lower lines again rubber band gone lower band gone click okay click apply and there we have that v app again so let's look at uh let's look at la uh yesterday on apple and let's talk about where a trader might look to enter into bearish trades well there's one position where i think it would make a lot of sense if we're looking to get into a trade where we're trying to make money because price is dropping do we do we want to do that when price is below average or when price is above average or maybe potentially well above average yeah we might be looking at times when when price has gotten substantially above the volume weighted average price line and it started to run down okay so if we get if we get a few white candles above v web and then we start to see red for some technical traders they align that with their other technical analysis that they've done on the chart and they say okay so we have a downward trending stock on a one-year chart that's up against resistance on a one-year chart and now we've escaped way above average in price and so if i'm trying to get the very best best price i can for selling to potentially make money if price falls we might look for exactly this sort of scenario it allows us theoretically to hopefully improve the entry to not just a specific day but even to specific five minute price bars okay john john if you have that question we've addressed that in great detail you may have missed this on the intro we went we went deep into what this v app is so you might just have to catch this on the archive that's okay you can catch up but it's a good question i like it when you ask that we can provide that clarification so that's potential bearish entry number one and you can see on this on this uh chart there have been a few examples of that here there was a shallower example here more examples here but there's another potential bearish entry and that is for some traders they'll look for v-wap when price has risen just up below that v-wap line and it's starting to get pushed back what's maybe going on right there with the institutional traders who've been waiting for average prices they may be starting to kick in some selling and that might influence prices a little bit lower which one of these seems to maybe offer the the the greater potential probably the ones where we get substantially above that v-wap line okay so that's bearish exits now interestingly or pardon me those are bearish entries interestingly uh those same signals may actually serve as bullish exits i think that makes sense if if one if if a signal is telling us that the stock is going to go down right if if we if we looked at our chart and we see anything on the chart that's saying oh it looks like for a while price is going to go down well if we're looking to sell our stock anyway maybe that's the time to sell it right so we might be looking at those high levels on v web for bare for bullish exits or just if we're bumping against that v web and can't seem to get up through that that might also be a bullish exit so what about bullish entries slash bearish exits let's look at that bullish entries as you suspected might be when we're well below average think about that if you're trying to buy at the best price of the day is that price going to be average is it going to be above average or is it going to be below average yeah we're going to be looking to maybe buy when we're down below so when price has come down through v web just our average line and we're substantially below we start to get some bullishness again that might be the five-minute candle that's offering the best opportunity of the whole day that's a possibility so there's an example here there's an example there that's that could be a bullish entry could also be an exit from a bearish trade that was taken you know at a previous time now a final example that i wanted to discuss this is another bullish entry is when bwap has already been above um above apartment when price has already been above v web maybe that institutional selling has kicked in push the price back down we've come back down to the average at that point maybe that institutional selling starts to ease off right those traders typically do not like to sell below average and so they may be monitoring this line and when they start to get down to that average they might start pumping the brakes easing off on the selling and allow some buyers to come back in so that can also potentially add up to boy this might also be a good entry for a bullish trade maybe a maybe an optimized exit for a bearish trade is that all the making sense hope so i think it's a it's a very interesting view of uh of a technical indicator that a lot of people may not be familiar with i think it's going to take some repetition but there's one other element that i wanted to introduce to this discussion that is unique to thinkorswim as far as i know and that is when when we load up vwap on thinkorswim we get these other two lines what are those two lines let's go back up and add those again now let's discuss their potential application you'll notice the minus two and the plus two those are important remember those two numbers but we're gonna come over here and click on our gear and we're going to add that upper band back show the plot line we're going to add the lower band back show that plot line click ok click apply and now we have that pink line and we have the orange line so what are those what's the pink what's the orange those are actually two standard deviation lines for those of you who trade bollinger bands this is in a way a bollinger band for v-wep it's different from from a bollinger band bollinger band because a bollinger band is traditionally centered around a simple moving average or an exponential moving average with v web we have two bands around the the volume weighted average price so if you're not familiar with this what we have are two standard deviation lines there's a line drawn up here and a line drawn down there and the way that i think about it is this is kind of lines drawn that project to try to try they're trying to capture about 95 percent of all price activity for a period of time i'm not going to go too far into what a standard deviation precisely is but its potential application here is that it might show other areas of support and resistance when we are at quote unquote extreme areas or extreme variation from that average price because when prices start to fall below average you might think to yourself well i wonder how far it goes down on average below average does that sound a little bit weird okay veronica says great it's interesting very tricky there's something there's there's a lot to think about here right is this the simplest indicator you've ever encountered no do we have to know exactly how it's built in order to theoretically put it into practice not really if we just think about this um just think that when we get down low if we get close to this orange two standard deviation line that may mean boy prices have fallen quite a ways below average and there may be a pending reversion to the mean we might go back toward the average if in any case if we're this far below average what do you think is happening with institutional buying activity if institutions are waiting to get below buy below average well that's quite a ways below average if uh institutions are looking to sell and it's not a guarantee this is exactly what institutions are doing on a case-by-case everyday basis with every stock right no it doesn't mean that but this line just attempts to to show us that we've gotten substantially away from that average line and so this might help to refine if we're trying to buy at the lowest lows some traders might use that at that lower band as an indication that we've gotten there if we're trying to sell at the highest highs some traders might use that upper band as the potential signal to do that so what you can do let me give you an assignment and let me show you how it might be done go to your own paper money account today load up v app you've seen how easy it is you just pop up here you type in vwap and it'll it'll pop up with all three lines by default you don't have to do anything just find v web add it to your chart okay then go to your watch list go to a daily chart on a five minute candle basis and see what sorts of buy and sell signals you can find okay so let's let's uh look at another example here let's come over here to our watch list of we'll stick with the s p 500 companies you can see i just started at the top this is the biggest company s p let's go to the second biggest microsoft let's look at what's happening what happened yesterday zoom in here and i'm i'm ignoring the after hours activity only because you know not there's not a lot of participation there i would assume that most audience members are not trading in those hours could we use this in the after hours theoretically we could there's not as much data to trade though and we might look at this and say okay so where might we be looking if we're trying to optimize an entry on microsoft yesterday do we want to buy when price is way above average and it's up close to the two standard deviation line above or would we would we maybe have preferred to buy down low when we're below average price and we're close to that two standard deviation envelope on the bottom side then says are these lines lagging or current with price or the pink and orange these are these are just as current as as the rest of the indicator again it's a good question yep all right yeah with microsoft we might have been looking oh we got down here to orange you can see we hugged along that orange line it's not a perfect entry but is it better than buying up here yup right would have would have very likely added up to a better entry than somebody that just randomly said okay well yesterday's candle was white so i'm just going to buy on a white candle right this is this is looking at the internal mechanisms of a daily candle and just trying to refine that entry a little bit further okay and if we're trying to sell maybe we're looking to sell up here when we're bumping up against that upper extremity yeah that's pretty interesting it's not a perfect indicator there are no perfect indicators if you find one come to my when come to my webcast chat and let me know that you've discovered it and i'll be forever grateful but this has been i think a pretty good discussion the volume weighted average price now it's your chance to go out and get some practice here if you if you if this is your very first time the way to really make that that new information sink in is to put it into practice and whether you understand the the specific construction of the indicator or not that's just not nearly as important at least in my estimation as understanding how it might be used right it's kind of like driving a car is it occasionally useful to know what's going under the hood yes is it potentially more useful to know that you push the accelerator and you steer and then you push the gas or the brake when that's important when uh when the time has come for that yep okay now some of you are asking uh does this work on other stocks it could just like any other technical indicator it's not a guarantee of success right all right everybody thanks for joining me today we've accomplished we set out to do we talked about how this thing is built how it might be used and we looked at some example charts to get some repetition so that we can start to recognize potential entries potential exits time to go get some practice as you go though and we have lots of education yet to come today but as you go come right down here click on the subscribe button do me that favor click on that subscribe button if you haven't done that already i know that some of you have some of you haven't but that just allows you to follow your favorite webcast series your favorite instructors more easily it cuts through a lot of the noise and clutter on youtube so i think it's a little quick technique it's totally worth it and if you're not following me on twitter do that right so as we switch over here to our disclosures remember um my twitter handle at c may underscore tda for the rest of our instructors i think except ben watson ben is at ben watson underscore tva everybody else's first initial last name but twitter is the best place to have a more personal interaction with your favorite instructors when you reply to me on twitter i reply back to you probably 80 90 percent of the time there are times when maybe it gets a little bit too political something like that i'm going to take a step back from that but other than that yeah i try to help out as you go also remember that risks are real we did use real examples in today's discussions not a recommendation or endorsement of those securities or the strategies discussed pat will be back again next week in the meantime i'll look for you on twitter i'll look for you in my in my regularly scheduled sessions i have one on a range of topics monday through wednesday uh department monday through thursday sometimes on a fill-in basis on friday as you've discovered today but hey whenever i see you again until that moment arrives i want to wish you the very best of luck happy trading bye you
2022-03-22 21:37
