Hi there, VWAPians!
One of the most frequent questions that I see in the chat is: What are the red lines that you draw and how do you determine where to put them?
And honestly? This is a GREAT question.
The horizontal red lines that you see on my chart are significant price levels.
These levels are drawn based on prior price action, and give me an idea of where a stock’s price could find support or face resistance during the trading session.
Drawing your own lines takes practice and patience, and if you’ve ever seen 8-Baller’s charts, you can tell he has BOTH in spades.
How I begin to teach members of my Warlock’s World to draw their own lines is to first focus on premarket levels.
I’m so PUMPED about trading premarket in this market right now. Often I can have multiple successful trades before the day even technically begins!
Let me give you an example of significant premarket price levels.
MSFT breaking Premarket
I take one look at almost any chart and I can find these levels.
But not everyone has my same Warlock powers. In the moment, I lock the prices in and get excited about the potential trades.
With VWAP trades, sometimes the few seconds it takes to determine significant price levels can make the difference in an entire trade!
Take, for example, the chart above from Microsoft (MSFT).
The area on this chart shaded in gray is premarket trading. The area with the black background is when the market is open.
When looking at a chart this early in the trading day, the FIRST thing I do is determine significant price levels. Here’s HOW.
Generally, there’s FOUR significant price levels that I consider.
- The premarket HIGH.
- The premarket LOW.
- The open market HIGH.
- The open market LOW.
Technically, there COULD be FIVE significant price levels, as I always consider VWAP.
As you can see on this chart, I drew my red lines on the premarket high and low.
The premarket low is the red line that touches the bottom of the lowest candle or candles in premarket.
On this chart, that level is at $308.78, and this level was touched by THREE separate candles.
To me, this line could prove to be resistance if the price were to fall and bounce off that level. OR, if the price fell BELOW this level, it COULD give me reason to go short.
The next red line that I marked was the premarket high.
The premarket high is the red line that touches the top of the highest candle or candles in premarket.
On this chart, that level is at $310.46 and was touched by THREE separate candles.
Generally, when a stock breaks VWAP to the upside and breaks the premarket high, there should be some follow through, allowing for a profitable VWAP trade.
Look at what happened with MSFT.
The market opened and the price was above VWAP already. Usually that’s confirmation of an upside move, but I prefer confirmation by WATCHING how the price interacts with my significant price levels.
The FOURTH candle of the day stops EXACTLY at the premarket high level. Coincidence?
Then, the next candle rises above this level.
The price rose from that significant level of $310.46 and topped out at $313 before falling back toward VWAP.
IF you’re nimble enough, that COULD have been a winning trade. But that’s QUICK. It takes TIME and PRACTICE to get up to that level.
What I SHOULD have done here, is mark that high of the day with a red line. This would be the open market high.
With my years of experience, I do these things mentally. But I SHOULD have done it. And so should YOU.
Thankfully, MSFT presented ANOTHER opportunity.
After the price fell back toward VWAP, I was WATCHING to see if the price would break down under VWAP, for a potential short to the downside toward my premarket low.
Instead, VWAP acted as a support level and the price never closed below VWAP.
The MSFT price rose back toward my significant price level, shuffled around this area for THREE minutes, then broke again to the upside.
MSFT then rose above the open market high level (that I should have marked) and continued to climb up to $315.12.
By selling into the move and raising my stop, this would have been a winning, risk defined VWAP trade.
As VWAPians, we sell into the move because we’re aligning ourselves with the institutions (another favorite 8-Baller phrase).
We raise our stops so that winning trades don’t go against us, allowing us to lock in profits.
For my VWAPians out there that are looking for guidance on significant price levels: stick with marking these four levels at first.
Once you start to get the hang of it, other significant price levels will start to become clearer to see.
Like I said, this takes practice and patience.
But if you take the time, chart YOUR significant price levels, WATCH the price action, and WORK the trade, I bet you’ll surprise yourself with the kinds of VWAP trading opportunities you can create for yourself.
That’s all for now, VWAPians.
Kenny “The Warlock” Glick
February 03 2022