In this video blog, our lead designer reviews a trading strategy sent to him. This strategy uses the VWAP (Volume Weighted Average Price) to confirm a change of trend after a significant gap up or gap down. Make sure you watch the entire video presentation located at the bottom of this blog post.

 

VWAP Day Trading Strategy Idea

This idea came from a friend of mine who wanted to see how a strategy he had been thinking about would hold up. Here’s a screenshot of the email I received from him, describing the strategy as best he could:

VWAP Day trading strategy with gap

 

VWAP Day Trading Strategy Implementation

Here’s the finite state machine I used for this algorithmic trading strategy. As this state diagram shows, we are looking for a gap up or gap down to start the potential trade. Once we see a gap up or gap down, we wait for either a bearish cross or bullish cross – potentially signalling a change in the direction – away from the direction of the original gap.

VWAP Day Trading Strategy

Here are the inputs for the strategy.  Initially, we kept the stops tight ($200), the gap size was set at +/- 4 ES Points, no limit price set (exit at the close) and the window for potential trades was set to about 1 hour after the market opens.

vwap-day-trading-strategy-easy-language

VWAP Day Trading Strategy Initial Analysis

Here is an example of a winning trade this Volume Weighted Average Price trading strategy showed.

VWAP (volume weighted average price) day trading strategy

VWAP Day Trading Strategy Final Analysis

Curious how this strategy did during the entire back-tested period? What happens if you use this strategy without a stop? What if you use a limit order? What if you make the trade window shorter or larger? What happens if you do the opposite – instead of shorting the gap up, you buy the gap up? Watch the complete video for answers to these questions an more.

Thanks for watching! Remember, trading futures & options involves substantial risk of loss and is not appropriate for all investors.

 

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