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5 Reasons Why Day Traders Love the VWAP

VWAP can be defined as “Volume Weighted Average Price” and it is mainly used for identifying the actual average price of the stock by the factoring volume in the equation.

You would not get a clear picture of the health of the stock by finding the price on the basis of the closing value of security.

Also Read: Three-Bar Reversal Pattern for Day Trading

 This is when the VWAP may add value than the standard moving average indicator as VWAP reacts to the movements in price on the basis of the volume of a particular period.

Also Read: Best Intraday Trading Techniques

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Reasons why Day traders love VWAP

#1 With the help of VWAP the traders may buy at a low rate and sell at a higher one

In case your tech trade strategy penetrates buy signal, you may probably execute order and then leave outcome to prayers and hopes. But the day traders who are professional and experienced never place an order when the systems are generating trading signals. Instead, they just wait patiently for move favorable pricing before pulling trigger.

If you notice a low price as per the VWAP indicators and if you buy the stocks at market price, then you would just be paying the average price for the stocks for that particular period.

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#2 VWAP may indicate a change in the market bias

Buying low and selling high is a wonderful strategy but if you consider yourself to be a momentum trader, then you may buy the stocks while the price is still shooting up.

Also Read: Top 10 Stock Market Tips to Get 100% Profits

VWAP cross which is a VWAP strategy would help you in trading the momentum in the market.

#3 The day traders now have a unique methodology on the basis of the VWAP indicator

VWAP weight average price is a very simplified equation which is being used increasingly for retirement pension on average for the investors. It is calculated through amount of each transaction price multiplied by the total number of shares that are traded. Thereafter this amount is divided by total number of shares in a day.

Also Read: Top 3 Investments When Bull Markets go down 

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#4 VWAP is the latest tool for the day traders

Making full use of technology is a strategy which offers a buying indicator. With the help of the VWAP indicator is quite reliable. Technological methodology basically triggers you for buying at a particular time when shares are showing the fair market price accurately. VWAP permits you to buy always low consistently. Even when you shorten the stocks you can easily sell at a high price.

#5 VWAP indicator offers support as well as resistance

Day traders are quite fond of VWAP indicator as many a times the price is able to get support as well as resistance around VWAP itself. If you will combine VWAP with a simple pricing action, the VWAP strategy would help you in finding dynamic assistance as well as resistance level in the stock market.

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Day Trade Setup – Three-Bar Reversal Pattern for Day Trading

The 3 bar pattern is the most common trade setup. The main reason behind it is that it’s an easy target for the amateur traders when they explore their options. The issue here is that when it is about day trading, the setup may be seen all around the place. Thus, for reducing the prospective amount of trades on an intraday basis some requirements need to be applied to the setup for filtering out noise.

The stock needs to be trending quite hard in 1 single direction. The higher or low of three bar formation needs to occur on middle candle stick. The 3 bar should close right above high of the first as well as the middle candlestick.

Example of when the 3 bar Reversal Pattern actually works

Let us first of all establish the baseline for when the 3 bar reversal pattern actually works. For the example as we’re day trading, we would be using the 5 minutes time frame for identifying this setup. The chart would be of spar from 2.20.2013. The stock is first made low and then it is sharply reversed.

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The 3rd bar in the setup closed right above the high end of the first and the middle bar. Again, the 3 bar reversal setup just needs a close which is above high of middle candlestick. But, we’re looking for close right above first and the second candlestick for the purpose of insurance. In this setup particularly, you will have buy FSLR on close at 36.03 dollars that was 1 penny above high of first candlestick at 36.02 dollars.

Day Trade Setup - Three-Bar Reversal Pattern for Day Trading

While the 3 bar reversal-pattern doesn’t have any specific exit trigger you may use a very simple moving average or a price target for booking your profits. One thumb principle which you need to follow is that you should maintain the 3-1 risk or rewarding ratio for all the trades.

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Now we will just have some fun and we would just stretch boundaries for this setup. What if in place of just identifying the setup on a particular day, what if we try to look for the setups which occur over a 2 day period. This way we would be able to honor the rules as they have been defined for the 3 bar reversal. But you need to wait for the 3rd bar to happen the next day.

This way, you would be able to take the advantage of increase in volatility and volume which occurs on Open. In the next example, we would be reviewing a 3 bar reversal pattern for RGLD that is Royal Gold which was developed over 2.20.2013 and 2.21.2013. You would be able to see that RGLD has a gap downwards in the day, traded flat almost throughout the day and finally closed near low.

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Then, the stock got a gap in the day for closing above high for the first as well as the second candlestick. This then triggers a rally of more than 2% by approximately 10 AM once Royal Gold exceeds the high-set on 02-20-2013.

Also Read: How to Do Swing Trading?

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