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VWAP vs VWMA – The Simple Guide

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VWAP vs VWMA

VWAP is one of the popular indicators used by traders. It is an intraday indicator, which best serves short term, particularly day traders.

Because of the volume component and the similarity of its name, traders often confused VWAP and another volume-associate indicator VWMA.

This is your simple guide of VWAP vs VWMA.

Are VWAP and VWMA the same? The answer is NO. Fundamentally, they are different. They serve different purposes.

If you are looking for an explanation of VWAP and VWMA, you are in the right place.

In this post, I will show you the difference between VWAP and VWMA.

We will look at the construction of these two indicators. The best way to determine if an indicator is useful to your trading is to understand the math behind it.

Without further ado, let’s look into the details now.

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VWAP vs VWMA – The fundamentals

VWAP vs VWMA on intraday chart
VWAP & VWMA on intraday 1-minute chart

What is VWAP?

VWAP stands for Volume Weight Average Price. It is a day trading indicator. The indicator’s calculation resets at the beginning of each trading session.

VWAP is widely used by both institutions traders and retail traders. Institutional traders use it to guide their positioning decisions while retail traders mostly use it to decide if the market is under or overvalued.

To understand how to effectively use VWAP, let’s look at the construction of the indicator.

How to calculate VWAP

VWAP is the cumulative average price with respect to the volume.

Take note that VWAP uses the typical price. Typical Price can be calculated by averaging High, Low, and Close prices.

Typical Price = (H+L+C)/3

Let’s look at the formula of VWAP.

VWAP = Cumulative(Typical Price x Volume)/Cumulative (Volume)

Or

VWAP formula

A quick explanation of VWAP calculation:

  1. Calculate the typical price of a specific time period by (High + Low + Close)/3
  2. Multiply the volume of the period to the typical price. (Volume x Typical Price)
  3. Calculate the cumulative total of (Volume x Typical Price) since the session’s open.
  4. Calculate the cumulative total of volume since the session’s open.
  5. Find the ratio of Cumulative Total of (Volume x Typical Price) and Cumulative Total of Volume. This is the VWAP.

VWAP applications

Institutional traders use VWAP as a benchmark for their trade executions. Institutional automated trading strategies often execute their orders around VWAP to avoid a huge spike in volume.

For day traders, VWAP serves as a reference point. It is similar to the Volume Point of Control of Volume Profile. Traders use it as a reference to decide if the current market price is over or undervalue.

What is VWMA

VWMA stands for Volume Weight Moving Average. The name often confused traders.

VWMA is one type of moving averages. In addition to closing prices, VWMA incorporates volume into the calculation.

If you are familiar with the moving average, it is easy to get a hang of the concept of VWMA.

How to calculate VWMA

To understand the calculation of VWMA, let’s start with Simple Moving Average.

A Simple Moving Average is the average of closing prices over the past N periods.

For example, 3-Day Simple Moving Average

3-Day SMA = (Close1+Close2+Close3+Close4+Close5)/5

Now, let’s look at the VWMA. Volume Weight Moving Average is calculated as below:

C=Close

V=Volume

3-Day VWMA= (C1xV1+C2xV2+C3xV3)/(V1+V2+V3)

As you can see from the formula, each closing price is weighted with its volume. In other words, the closing price with higher volume carries more weight in the calculation.

Difference between VWMA and SMA
The difference between VWMA & SMA

The chart above illustrates the difference between VWMA and SMA.

SMA rises when the market rises, as it is an average of closing prices over the past 20 periods.

For the same look-back period, the VWMA moves below SMA when the market is trading higher but with lower volume.

VWMA applications

If you have already used a moving average in your trading, VWMA might give you additional insight.

There are traders using VWMA & SMA crossover to determine trend strength. This approach adds a new dimension to trend analysis with volume weighting.

Trading with VWAP

Day trading example using VWAP, volume profile, and order flow
Example of day trading Futures with VWAP, Volume Profile, and Order Flow

As a day trader, VWAP is one of the essential tools in my trading. I mainly used it in futures trading.

There are many ways to trade with VWAP. One of them is to work along with Volume Profile and order flow analysis.

With the understanding of the Auction Market Theory, you can build an effective day trading strategy.

Recently, I have been trying it in the Forex market. Although tick volume is less than desirable, it does offer a good general read of the market.

Conclusion – VWAP vs VWMA

I hope you have a good understanding of the constructions of VWAP and VWMA now.

The key differences between VWAP and VWMA are:

VWAP is cumulative of average price with respect to volume. It does not drop off any data over time. The calculation begins at the start of the trading session.

VWMA is a type of moving averages. The indicator calculates the average of closing prices with respect to the volume. It has a fixed period where older data will be dropped off from the calculation. The calculation is continuous across sessions.

They are different indicators and should not be confused.

Indicators could be useful to your trading, It could hinder your trading as well. In trading, less is more.

You do not need more indicators to achieve success. As a rule of thumb, if it confuses you, chuck it in the bin.

Trading Tools

The charts posted on this post are created using TradingView. It is my recommended charting platform for Forex trading purposes. It offers a wide range of market data, the flexibility of strategies and indicators building using PineScripting, and live trading integration.

If you are interested in knowing more about the tools I use in my trading, such as trading journal, charting platform, or trading course check out my Resource page.

Do you have any experience trading with VWAP or VWMA?

Do you have any questions? Feel free to drop me a line in the comment section. I am happy to help.

How To Draw Support Resistance Levels- A Simple Guide

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How To Draw Support Resistance Levels
Table Of Contents
  1. What is the support resistance level?
  2. Guidelines to draw support and resistance levels
  3. How to draw Support Resistance levels – Final words
  4. Try Tradingview Pro Charting Platform For 30 days

Support and Resistance levels are one of the oldest and yet, the most effective methods, to analyze and trade the markets. It is so simple that it is often overlooked by new traders.

It is overlooked because new traders often get attracted by the fancy strategies or indicators.

In this article, let’s have a look at how to draw support resistance levels effectively.

I didn’t invent the strategy, I learned it. I have been trading for over 14 years. And I can’t remember how many books and courses I have read and studied. Everything you read on this blog is the result of years of trading and learning.

The methods might not be original, but they are effective.

Without further ado, let’s move on to look at what support resistance levels are, and how to draw them effectively.

What is the support resistance level?

The textbook definition:

Classical Support Definition

From Technical Analysis of The Financial Markets by John J. Murphy

Support is a level or area on the chart under the market where buying interest is sufficiently strong to overcome selling pressure.

Technical Analysis of The Financial Markets by John J. Murphy

Visually, think about the price levels that the market repeatedly tests or the level with multiple swing lows. That’s where the market finds support.

Classical Resistance Definition

Resistance is the opposite of support. It is a level or area over the market. Selling pressure overcomes buying pressure here. A price advance is turned back.

Technical Analysis of The Financial Markets by John J. Murphy

(But hold on, it does not mean you should trade at this level just yet, keep reading)

These are the text-book definition of support and resistance. But that is not what I would use to trade.

But they said Support and Resistance is a zone

Yes, that’s not wrong.

I prefer to start looking for a level and expand around it to construct a small zone.

In this post, I will focus on looking for a high probability level.

When I draw support resistance levels, there are few guidelines I follow. There are no hard rules. The more you practice, the more you will learn.

In general, I found these guidelines are pretty effective.

When drawing a support resistance level, start from a higher time frame, and working down to the lower time frame.

Don’t waste too much time on the “muddy” area. Always look for the obvious. Focus on the clean levels.

Guidelines to draw support and resistance levels

#1 The more touches a level has had, the more significant the level is.

More touches a level had, the more significant it is

A price level that the market respects and reacts serves as a good support resistance level. Use this as one of the factors when drawing a level.

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#2 The longer a level is held, the more significant it is when it is broken.

The longer a level is held, the more significant it is

Similar to point 1, when a support or resistance level holds up the market for a long time, it is significant. The market respects it.

When it is broken, it signals the major change of sentiment, and it serves as an excellent trade location.

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#3 The more times a level is tested, the weaker it becomes. It is more likely to be broken.

The more times a level is tested, the weaker it becomes

Surprised?!?

The old wisdom taught us, the frequently tested level shows strength. The truth might be just the opposite.

Let’s put it this way:

A support level holds up a price because there are buying orders waiting. The orders could be from any sources. Be it bank, retail, or institutions.

However, when the same level has been tested multiple times, the orders are filled and eventually will dry out.

What will happen when there is no more buy order to hold up the price? Where do you think the market will go now? It tanks.

The same principle applies to resistance levels.

The more time a resistance level is tested, the selling pressure (the sell orders) at the price level is consumed and reduced.

When the sell orders are drying out, breakout happens. The market continues moving up until selling orders appear.

As a guide, I keep a rule of two-touches:

I only trade at the first and second touches of a support or resistance level. After the first two touches, I will wait for the break of that level to decide the next action.

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#4 The inverse support or resistance levels are the ideal trade locations

The inverse support or resistance levels are ideal trade locations

What do I mean by “Inverse Level”?

Inverse support is a broken support level. It becomes a resistance when the market revisits the level.

Inverse resistance is a broken resistance level. It becomes support when the market revisits the level.

When a level is broken, it signals a change of sentiment. It shifts the willingness of buying or selling.

Let’s take a support level as an example. When a support level is broken, it signals the selling pressure overtakes buying pressure. In other words, there is a new willingness to sell.

When the market revisits the same level, it is likely to find resistance at the level.

How to decide which inverse level to trade? This brings us to the next point.

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#5 Look for an inverse level that was tested multiple times before it was broken.

Inverse levels

The more times a support level is tested, the stronger the inverse level will be.

When a support level is tested multiple times, buy orders are filled. It takes a lot to break a strong support level. Eventually, selling pressure overtakes the buying, the support level is broken.

There are now more selling interests below this level. It now serves as a strong resistance level.

The same rule applies to a resistance level.

To define a good inverse level, I apply a rule of two-touches:

Broken resistance turns support

When looking for a support level, I prefer a broken resistance level with at least 2 touches before the breakup.

Broken Support turns Resistance

When looking for resistance level, I prefer a broken support level with at least 2 touches before the breakdown.

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#6 Focus on recent price action and work your way to the left

Some traders like to go as far as they can to draw levels based on historical swing points. Well, they might be right, but that’s not what I would do.

I am a short term trader. I focus on the most recent price structure because that is what the market is “thinking” right now.

I put more weight on the recent swing points when drawing support and resistance levels. It could be days or weeks. I won’t go back years of data to draw levels from there.

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If you are interested in using Tradingview, you can try out the Pro membership FREE for 30 days. This is an excellent time to check out the powerful features of Tradingview charting.

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How to draw Support Resistance levels – Final words

Support and Resistance levels are one of the many ways you can use to look at the market. It has been used by professionals, but there are also many of them that do not use it. It is not a holy grail.

Trade Location + Entry + Execution + Management

Secondly, support and resistance levels are used as trade locations. That’s just one piece of the trading puzzles. The next step is to work on your entry method, execution, and finally management.

If you are looking for an example on how to use support resistance levels, I wrote a short blog post about using Support Resistance levels to manage your exist strategy.

Thoughts

Let me “destroy” your dream before we finish up this post. If you are constantly looking for some rules you can follow and start making money, you will be disappointed.

There are no exact rules you can follow in trading.

It is always through discovery and testing. Failures after failures. And maybe, more failures. You need to find a methodology that fits you.

Having said that, study and improve your skills in identifying support and resistance levels give you a good head start.

Alright, this post is longer than I expected. Hopefully, I offer something useful.

Tools For Traders

All charts posted on this article are prepared using TradingView. TradingView is my recommended Forex charting platform. It is web-based, stable, and offer a great range of market data. It offers both free and paid plans.

If you are interested in learning more about the tools I used in my daily trading business, check out the resource page here.

Do you have any questions or comments? Feel free to drop me a line in the comment section. I am happy to help.

Trading Lessons I Have Learned This Year

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[Update 2020]: I wrote this post back in 2009. It still provides valuable lessons to traders. I thought it will be useful to include this in the Back to Basics of trading series.

trading lessons learned

I am still managing a couple of open positions, and unlikely to open any new position next week. So, it is almost time to call it a year. And what a year! This post is not meant to be another “how many thousands of pips I’ve made in 2009′. Who cares?

I am thinking of writing up a summary of the trading lessons I’ve learned from experience, books, or interactions with other traders over the year. You might agree or disagree, again…that’s not my problem. Most of these are quotes from books or articles which I’ve collected. By no means, I am claiming my own.

Trading Lessons Learned

  1. You have to be able to lose in order to win.
  2. Always be realistic with your monthly target.
  3. It is absolutely OK, and most of the time, helpful to shut down all social networking such as Twitter, StockTwits, Facebook. Think about it, if your friend is affecting your work, tell him to come back later. Trading is about concentration, and definitely a personal and lonely business. To be a successful trader, we must walk alone in our days and do it alone.
  4. If you are really seriously addicted to twitter, try to challenge tweets who call trade, instead of following them. Always assume these people on twitter(including me) are wrong. The key is to NEVER FOLLOW A CALL on twitter.
  5. When your position is right, you have to do nothing instead of doing nothing when you are wrong! [constantly taking early profit will do you more harm than good]
  6. You must keep your losses small and take more small losses than small winners to come out ahead. You will become the best trader you can be by being wrong small, not right small.
  7. It is your job to know you are wrong and not the market’s job.
  8. You have to press your winners if you really consider yourself to have the ability to make a living or extra income from trading.
  9. When you place a trade, don’t ever think this is the only trade to make. There are thousands of trades you can make. You aren’t going to miss a move for long if you trade correctly. You aren’t going to chase markets if you trade correctly. You must have a plan to enter positions based on each market’s criteria.
  10. When a market doesn’t go up anymore, somewhere it isn’t correct to stay in the position, regardless of the expectations.
  11. Your trading career should be a long-term expectation on your part. You must look beyond one day in your trading career.
  12. We should concentrate on protecting what we have rather than what we expect to make first.
  13. If you want to win, you’ve got to know the rules; and also, you can’t win if you are not at the table.
  14. Gambling is taking a risk when the odds are against you; Speculating is taking a risk when the odds are in your favor.
  15. In order of importance: Preservation of capital. Consistent profitability. and the pursuit of superior returns.
  16. It is always better off to learn from observed mistakes.
  17. Traders have a choice: Either face the truth of trading or look for the nearest exit.
  18. The best loser is the long term winner.

The list can go on to hundreds..I am just quoting the lines I found to be helpful to me over the past year.

On a personal note, the most significant event I have observed this year is my active involvement in Twitter. There are times, reading tweets is a pure disturbance. And there are times, gems are found while interacting with some traders. So I’ve learned to shut down twitter at a certain time when I am trading or making a decision.

2009 has been an eventful year to me, on both personal life and trading. 2010 is definitely not going to be a dull year, and I am looking forward to another exciting and challenging year.

Here is to a great 2010.

Failure patterns…of a trader

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Failure Patterns of a trader
Failure Patterns of a trader

I was reading some trading articles, at the same time, review my past performance. What I am trying to do is identifying some fatal patterns that caused my losses, the failure patterns of a trader. Why?

I am not referring to chart patterns, but the patterns of traders’ behaviors. When I first started trading, I was told to observe the behavior of winning traders, and learn from them. I can’t agree more with this idea.

That’s why I would encourage new traders to start reading books like Market Wizards: Interviews with Top Traders and The New Market Wizards: Conversations with America’s Top Traders (A Marketplace Book).

It is important that you want to learn what winning traders do. However, I think it is important to observe the behaviors that cause the majority to fail. Here are some patterns that I have observed from myself and some traders that I know. Of course, there are still a lot of them, I am listing 4 failure patterns that I have experienced.

4 Failure Patterns of a trader

Laziness

We like shortcuts. Instead of working on studying the markets, understand the mechanisms of trading, we focus on looking for answers.

We want something that can give us a signal to “buy” a “good stock” and waiting to collect profit as soon as possible. We do not accept the fact that it takes a great deal of effort and time to have a feel of the market we are trading, such as observing the changes of volatility, reversal patterns, to test our strategies, and to prepare our own trading plan, etc. But, “good news” is, most traders will realize this problem when have enough losing trades, and get really beaten by the market. In trading, the lesson is always learned when confidence and money are no longer with us.

Lack of focus

We know and believe there are opportunities to make good money from trading.

We jump from stocks to futures and then options or even spot forex. Wow! Isn’t it cool? And , I guess you know, I have met more failed “multi-markets” players than others. All right, I was one of them (Other than Options, I have traded stocks, futures, warrant, CFD, and spot forex).

I am not saying it is not possible to play different markets or instruments concurrently, but, that’s not for everybody. There is a lot more to learn from one instrument, for example, futures trading.

I see stocks trading and futures trading are like playing tennis and table tennis (Ping-Pong, if you are from Asia). The rules are similar, the ways of playing are also similar, but the strength, the speed, and, the playground are totally different. Don’t expect a table tennis player to do well in tennis without much training.

Even though you have finally chosen futures trading as your play ground, stop jumping around from mini-sized Dow to Soy Bean then E-mini S&P then Euro futures and finally Pork belly.

Yes, I know there are traders trading a basket of futures, but, maybe that’s not for you, yet.

Focus on E-mini S&P, for example. How well is your system/strategy on this market? Is the tic size and volatility too big for you? Think. If not, go lose some money, then you understand what I am trying to say. If I can’t be consistently profitable in one market, do I expect to do well in trading basket futures at the same time?

Overconfident

First of all, I know traders experienced a lack of confidence as well, but I see more traders overestimate themselves.

I had a winning streak of being profitable every trading day for around a month when I started trading futures. Man, I thought I should be included in The New Newmarket wizard! LOL.

I did not know about the trading plan, risk management, etc. I just simply jumped into the market, and get a couple of hundreds home every day. I was just lucky. Until I faced consecutive weeks of drawdown or staying flat, I know, I need to start from scratch work on planning, testing, etc..

Overconfidence will cause lack of confidence once you are beaten.

Taking losses blindly

I am always puzzled when people tell me it is ok to lose money in the market.

Yes, we have the accept the fact that every trader will have losses even drawdown during the life of trading. But do you really learn from your losses? or just simply think that losses are part and parcel of trading?

You dumb. Losses are NOT ok if it is not part of your trading plan. You do not have a plan to execute, then how can a loss become part of your trading?

“I take loss because my setup failed to perform or the chart pattern I was looking failed to continue forming.”

“I take loss because I have receive margin call from my broker or I finally “can not take it” anymore.”

See the difference?

Seriously, losses are definitely NOT ok. Think, why did you lose? Stop telling yourself to accept losses blindly. There must be a reason you give away your money.

The moment I start observing failure patterns of trader, that’s the moment I identify my own problem and try to solve it.

Just another piece of random rant from Gav.

If you are interested in learning more about trading, make sure to check out my Back to Basics of Trading series.

About programming and trading

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About Programming and trading
About Programming and Trading

Don’t get me wrong, I am not selling any trading system here. Before I go into the main point, I am thinking of sharing some of my new findings of Tradestation.

I spent most of the past weekend reading some books in my trading library and playing with EasyLanguage programming on Tradestation.

I was preparing the program for backtesting, and to my surprise, I was in fact, automating my dummy trading system.

With the help of some functions in Tradestation, I am able to fire basket orders for execution automatically. Well, good findings, but, now it is not the time for me to utilize it. Anyway, It is useful to Asian traders like me, who trades in the middle of the night. I can always replace the order function with Alert, just to wake me up when an opportunity appears.

Some thoughts from programming.

As you might know, to code a piece of software, you need to have a defined program flow, logic, specific declarations, input, and return values, etc. (I know some readers like ZBS, Eyal, and Richard are far better than me when it comes to these IT stuffs, so please correct me if I sound funny).

You can’t have something which is ambiguous. You gotta tell the program what it should do. I have no problem with coding, but I was stopped a couple of times when programming my trading system. I have realized that I have been making too many assumptions and judgments when I was making dummy trades.

For example, “we want the price pull back to the area near 20-EMA”. Fine. How “near” is considered near? 1 tick, 2 ticks or 5 ticks away from 20-EMA? Another example, “We want to enter the trade above a narrow range bar”. Excellent idea. But how “narrow” is considered as narrow? One more example, “When the price is trending up, I would go long” , Cool.

Hey, What do you mean by trend up?

Dave commented on my system before as “I see there is a lot of “play” in the system, In other words, there are a lot of guidelines, there are very few real rules.” I fully understand his point when I started programming.

Here are some suggestion to evaluate if you really have a set of real trading rules for your system. You don’t have to do the boring coding. Instead, I would suggest trying to write out Pseudocode of your system. For example, a simple moving average crossover system should look like something like this

If 5-EMA crosses above 20-EMA then
  if High-Low <=1.5 points and (low-20-EMA)<=2 ticks then 
    Buy next at high +1 Tick. 
    Stop loss at low - 1 Tick 
  end
end

(The code above is for illustration purpose, you will go burst trading that)

Nothing so technical, but it is one of the ways to think through and stop cheating yourself by thinking you do have rules.

Guidelines are just not enough.

I have found it to be inefficient when I need to make too much judgment and guessing during the trading sessions.

I am not suggesting to have any magic values for narrow range candle or distance from EMA, but you need to be specific in defining your system.

Just a quick note to share something which I find to be useful, nothing fancy. I am still working on backtesting.

If you are interested in learning more about trading, make sure to check out my Back to Basics of Trading series.

25 rules of trading discipline by Douglas E. Zalesky

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25 rules of trading discipline

I read an article by Douglas E. Zalesky in SFO magazine back in 2006. It is a great list of rules traders should read.

Here I am listing out 25 rules of trading discipline discussed in his article. I think it is good to spend a couple of minutes every day to go through the list before start trading.

25 Rules of Trading Discipline

  1. The market pays you to be disciplined.
  2. Be disciplined every day, in every trade, and the market will reward you. But don’t claim to be disciplined if you are not 100 percent of the time.
  3. Always lower your trade size when you’re trading poorly.
  4. Never turn a winner into a loser.
  5. Your biggest loser can?t exceed your biggest winner.
  6. Develop a methodology and stick with it. don’t change methodologies from day to day.
  7. Be yourself. Don’t try to be someone else.
  8. You always want to be able to come back and play the next day. Once you reach the daily downside limit, you must turn your PC off and call it a day. You can always come back tomorrow.
  9. Earn the right to trade bigger. Remember: if you are trading poorly with two lots you must lower your trade size down to one lot.
  10. Get out of your losers.
  11. The first loss is the best loss.
  12. Don’t hope and pray. If you do, you will lose.
  13. don’t worry about news. it?s history.
  14. Don’t speculate. if you do, you will lose.
  15. Love to lose money. What I mean is to accept the fact that you are going to have losing trades throughout the trading session. Get out of your losers quickly. Love to get out of your losers quickly.
  16. If your trade is not going anywhere in a given timeframe, it?s time to exit.
  17. Never take a big loss. Only a big loss can hurt you. Please review rules #5, #8, #10, #11 and #15. If you follow any one of these rules you will never violate rule #17.
  18. make a little bit every day. dig your ditches. don’t fill them in.
  19. Hit singles, not home runs.
  20. consistency builds confidence and control.
  21. Learn to sweat out (scale-out) your winners.
  22. Make the same type of trades over and over again? be a bricklayer.
  23. don’t over-analyze. don’t procrastinate. don’t hesitate. if you do, you will lose.
  24. all traders are created equal in the eyes of the market.
  25. It’s the market itself that wields the ultimate scale of justice.

Full article in SFO [PDF] : The 25-Point Mantra: Discipline for Day Trading

This blog post is also part of my Back to Basics of Trading Series, feel free to check it out.