Below is an excerpt from a subscriber who was reflecting on a day of trading from which he came up with some thoughts about trading in relation to VWAP. Thanks for sharing, Jon.


My retrospective analysis was most illuminating… namely that I did not generally trade in and/or out following a daily VWAP (about 80% of the time). The reasons were varied. But the bottom line was that on those 80% of the trades I either lost money, sometimes a lot, or at best broke even. If I would have merely timed my trades according to VWAP (which would still have been a trade and not all that different in time), I would have broken even or made money. In the other 20% of the trades, I broke even or made money with the only poor entry being entering a position in the first 20 min before a good VWAP was established. In all cases that I bought above VWAP (sort of a mini-chase), I could have waited for a pull-back to VWAP and done much better.

While I am not going to generalize based on one day which is “in hindsight”, I did find it most illuminating and perhaps instructive.

But not to over apply, I looked a PLCM rebound from the lows of the AM after a 30% gap down. Someone I respect traded this both up and down intraday. For this using either a daily VWAP or intraday VWAPs would generally work but with very little profitability, which for me would make it not worthwhile. However, if one could really have the feel of the moves based on action, T&S and bid/asks, it offered a lot of opportunities, which is what the person who pointed this out (historically) did and traded very profitably.

So, my conclusion is tentatively, respect the VWAP trade for a “normal” non-gapping (or small gap) trade where the stock is already on the trade watch list (so some historical trading trends are established as evidenced by MA’s or similar). But trade an “opportunistic” situation using different criteria or at least not relying on VWAP as much and certainly not solely.