Welcome to part two on the VWAP (volume weighted average price) Indicator Day Trading Strategy. In part one we talked about trend trading, and in today’s video we’re going to talk about a reversion to the mean style. If you haven’t seen part one, I encourage you to view it, but go ahead and finish this one first, and then you can go view part 1.
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As a quick review, the VWAP, volume, weighted, average price, is this black line here. (See video) That’s kind of the neutral area and as you can see the market is below it. Here we have a trending market, and this is what we discussed in the first video. We retrace to it, and down we go, and that’s a thing of beauty. It doesn’t always do that, but that is how we would do it for trend trading. Now, I want to show you how we set up this indicator which will be the opposite of trend trading.
VWAP Indicator Day Trading Strategy
You’ll see in this video, I am using the standard deviations multiplier, one, two, and three, and that’s key to what we’re going to use in our trading today. We’ve got our volume, weighted, average price here, or VWAP, and our standard deviations above and below, and I like to use three lines. We like to see this stay below the volume, weighted, average price, and also to stay in this channel and zone down.
Then we break down here to the standard deviation. We come back up, and go down to reach the lowest standard deviation line. I’ve got three lines below, and three above. For this particular setup, we’re talking about the third one, either above or below, and in this case it’s below. That’s considered an extreme reading, and it doesn’t reach that third line often. A lot of the best trades that are the highest probabilities don’t occur very often.
They’re unusual, or extreme and that’s what we’re looking for. To trade that back to normality, or back to a statistical mean. This is one of those examples, so we wait for this puppy dog to go ahead and crank down to the third one again. This is not going to happen every day on every stock. Not even close, and it will not happen most days. We’re waiting for when it does happen, and then we’re gonna trade this back to the VWAP, volume, weighted, average price. This is a reversion to the mean type of statistical model, and the opposite of trend trading.
Wrapping Up!
We’re looking for the market to get overextended, or some people would say oversold, and then for it to get back to technically a mean. Remember the volume, weighted, average, price is a little different than a moving average. It incorporates volume into it as well, and it’s cumulative. Thank you for being here today, and remember to go back and watch VWAP Indicator Trading Strategy, Part 1.
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