Sunday, February 12, 2017

VWAP Set up Filters 2/12/17

VWAP setups are some of my favorite trades. I view VWAP as the average intraday price of everyone trading the stock and to answer the questions "Are the long's or short's winning? Am I fighting the trend?". My two favorite trades to make are getting long at a pullback to VWAP after a strong opening drive -- and vice-versa for weak stocks-- and getting long a stock at VWAP after it traded weakly under VWAP all day (VSTO on Friday and my playbook on CSX). Large institutions also use VWAP as an entry point for intraday orders. In my opinion, a volume increase at VWAP in a high RVOL stock signal where it might trend for the rest of the day. Over 80% of intraday trading volume is done by algorithms, so it seems likely that the VWAP order flow is also mostly algos. I use two time-and-sales windows for this reason. One only has the NYS and NAQS so I can see what the market-makers are doing. The other has the other exchanges a different color for prints > 10k. 

I have four filters to catch VWAP setups for stocks between $10-140, >600k AVOL, >1.5 ROL, >0.7 ATR, and <$0.05 bid/ask spread:

1. Strong Stocks Retesting VWAP: Up >1% on the day, Daily Low > VWAP -0.25ATR, Price > VWAP, Price < VWAP + 0.05 ATR. I use this filter from 9:45-12:00, although you have to be pretty quick the earlier it is. This filter catches strong stocks making pullbacks to VWAP after a strong opening drive. I like to catch them above VWAP because I notice they often touch and go and I use VWAP as a stop if they don't quite make it. If I get stopped out I wait for a consolidation breakout. 
2. Weak Stocks Retesting VWAP: Down <-1%, Daily High < VWAP + 0.15 ATR, <VWAP, >VWAP - 0.15 ATR). This filter is the reverse of the first with some slight modifications. I notice these stocks often make a second pullback to VWAP after the first but never quite make it. This lower-high is one of my favorite places to add size when shorting. I also use it for more of the day (like with YELP on Friday around 3:00)
3. Shorts Trap: Down < -1%, Daily High < VWAP, Price > VWAP - 0.05ATR. I use this filter on the close to find situations where a really weak stock finally breaks VWAP and shorts start to worry and cover quickly. 
4. Big Order: Price < VWAP + 0.05ATR, Price > VWAP - 0.15 ATR, Minute Volume > 400k OR Minute Volume > 0.05 Accumulated Volume  I use this filter in the middle of the day to catch a huge order or volume spike near VWAP. I am still trying to improve it to catch smaller volume increases.