Hello, loyal VWAPians and soon-to-be converts!
For all the new kids in the crowd, the only indicator I trade is VWAP, which stands for Volume-Weighted Average Price.
In a nutshell, the VWAP is a trendline that often acts like a magnet for the underlying shares — sure, they can skyrocket above or plummet below the VWAP, but in the end they’ll always come back.
In fact, I’ve compared the VWAP to Popeye the Sailor Man’s can of spinach.
When Popeye is feeling run-down and needs to bulk up quickly, he refuels by finding a can of spinach to crush. When a stock’s upside or downside momentum begins to stall, it tends to revert back to the VWAP, where it often finds new life in one direction or the other – in other words, it finds that can of spinach.
So, just like Popeye can’t go too long without his greens, stocks can’t go too long without checking in with the VWAP.
Recognizing this dance allows me to make money on both sides of the aisle.
If a stock gets too far stretched above the 1-minute VWAP, I know that just like a rubberband, it will ultimately snap back — presenting an opportunity for me to fade (or short) the shares.
On the other hand, if a stock strays too far south of its VWAP, I look for opportunities to go long, making money as the shares revert north.
I’m a day trader, so I do this on an intraday basis — I don’t like holding positions overnight. I usually like to get in and out of trades quickly, and I aim to never take off an entire position at one price.
Further, while I may be bullish on a stock to start the day, I might be bearish later that same session, depending on that intraday VWAP dance.
However, while I always say “Every stock has a VWAP story,” that doesn’t mean every stock is equal in the eyes of The Almighty Omnipotent Warlock (that’s me).
So today, I want to discuss what kind of stocks I’m looking to trade with the VWAP.
- Earnings or some kind of news.
I need stocks that are volatile to make money on VWAP, and nothing brings volatility like earnings season.
I have my finger on the pulse of the earnings calendar, and I like to jump in on those initial earnings reactions — something you can see me do each trading day from 9:30 to 10:30 a.m. ET right here.
Of course, the catalyst doesn’t have to be an earnings report — any kind of big overnight news will do, as long as it moves the shares.
When it’s not earnings season, I like to watch the pre-market headlines, and I keep a rotating list of stocks that have been VWAP winners for me lately. If it ain’t broke, don’t fix it!
I also keep an eye on upgrades and downgrades each morning, as I’ve found that upgraded stocks are usually near a top once analysts chime in, and vice versa for downgraded stocks nearing a bottom.
- Trades at least 1 million shares a day, on average.
Because I’m trading a VOLUME-based indicator, I need stocks that see decent volume.
A stock that trades an average of, say, 150,000 shares a day won’t get as strong a VWAP signal as one that trades more than a million a day — so that’s my bottom-line number when I screen.
- Trades at least a 200-300 contract average.
This goes for stocks where I’m looking to trade options. Again, I like to know the stocks I’m gonna trade can move, and that I’m not the only one playing hundreds (or more) contracts at a time.
After all, whether I’m long or short that stock, there needs to be money on the OTHER side that I can take!
This kind of volume also tells me that the stock is liquid enough for my liking, which brings me to…
- Has weekly options.
A stock that doesn’t have weekly options offered usually is too illiquid for me.
On occasion, I’ll use options instead of buying or shorting shares outright — though never just before earnings, because I don’t like guessing direction (VWAP tells me that!) OR paying up for option premiums because a big move is being priced in.
When this DOES happen, I typically like to go AT-THE-MONEY (ATM) — when the option’s strike price and the stock price are near one another — using options expiring the first Friday possible.
Because remember, I’m still a day trader — I’m looking to open and close positions in the same session, most of the time, so there’s no need to buy more time value than necessary.
Stay tuned for more on my VWAP dynamics!
One response to “The Ideal VWAP Stock”
June 14 2021