Coppock Curve

Edwin Sedge Coppock, an economist by profession developed the Coppock Curve in 1965, which is a momentum indicator to identify long-term buying opportunities in the S&P 500 and Dow Industrials.

Coppock used monthly data to find buying opportunities but did not use the indicator much for sell signals.

Now let’s take a look on how the Coppock Curve is calculated?

Coppock Curve = 10-period weighted moving average of the 14-period RoC + 11-period RoC

RoC stands for Rate-of-Change which is the momentum oscillator and oscillates above and below the zero line. The default setting for the Coppock is 11 and 14 periods.

The Coppock Curve is a smoothed momentum oscillator and can be used on any timeframe while investors can choose based on their desired trading/investing style and time horizon. Coppock Curve is similar to the most widely used indicator- MACD

The weekly charts produce many more signals than the monthly chart. Likewise, an intraday chart would form more signals than the weekly or monthly charts.

Apart from choosing the timeframes, parameters can also be adjusted based on the trader’s choice. Traders can choose whether they want to go for a faster or a slower Coppock Curve indicator. A shorter RoC setting would make the Coppock Curve more sensitive and faster, which would be best for Intraday traders. Meanwhile, a longer setting would make the Coppock Curve less sensitive and slower which could be a favorable indicator for swing traders.

How to identify signals using Coppock Curve

If the Coppock Curve crosses zero and enters into positive territory than a buy signal is generated.

If the Coppock Curve falls below zero and enters into negative territory than a sell signal is generated.

Below is the one day Amazon chart since 2014 (till July 6^th, 2016). The buy signals in the below chart are highlighted with the blue line while the red line indicates the sell signal.

As you can see, long-term traders would have a number of opportunities to enter the bullish trends for Amazon.

Coppock Curve

Coppock Curve could also be used to trade ETFs.

Below is the image of the PowerShares QQQ Trust, Series 1 (ETF) (NASDAQ:QQQ) 3-minute chart from July 1^st 2016. As you can see in the beginning of the chart, a buy signal was generated during the initial trading hour, as the Coppock Curve crossed above the zero line. Accordingly, we opened a long position at $107.61.

After about an hour or so, you can see that the Coppock Curve began heading towards zero. Simultaneously, you see that the PowerShares QQQ Trust ETF is consolidating. After the Coppock Curve fell below zero, immediately we exited the position at $108.2.

Coppock Curve Long Position

Now, since the founder of the curve used longer time frames to identify buying opportunities, let’s now shift our focus over to daily charts.

Below we have a chart of Goldman Sachs from the period of March 15^th, 2016 till June 30^th, 2016.

On the last day of March, the Coppock Curve is showing a positive trend, as the curve is above zero and generated a positive signal.

Accordingly, we initiate a long position on March 31^st at $156.02. As you see in the below chart, the Coppock Curve has maintained a positive trend for the initial week. On May 10^th 2016, the Coppock Curve fell below zero and gave a sell signal. We cover our long position at over $160.

However, if you combine the Coppock Curve along with the Hull MA, we could have booked our profits in a better range, as the indicator started giving a bearish trend well before the Coppock Curve’s sell signal. If we had followed the Hull MA indicator, then we could have booked profits near $163. However, this depends on the trader’s preference.

Coppock Curve Long Trade Signal

Divergence with the Coppock Curve

Another way of trading the Coppock Curve is identifying divergences with the indicator and the current price action.

A bullish divergence occurs when the market makes a higher high, but the Coppock curve is unable to exceed its previous high.

Below, you can see the 5-minute chart of Alcoa from May 2^nd to May 30^th, 2016. On the extreme left hand side of the chart, you can see that we have highlighted the new highs of the price, while the Coppock curve is making lower tops.

However, the Coppock curve immediately raised above zero while prices also increased, confirming the bullish divergence. However, bullish divergence is not a definite indicator of the trend, which is why traders should avoid taking positions solely based on divergences with the Coppock Curve.

Coppock Curve Divergence

Similarly, a bearish divergence occurs when prices decline from lower bottoms, but the indicator makes a higher bottom. From the above image you can see that the highlighted elliptical part for the same Alcoa chart has formed lower bottoms, but the Coppock curve made a higher bottom indicating a bearish divergence. You can see how the stock has fallen after that, as highlighted by a red trend line in the chart.

Again, we do not recommend making trading decisions solely based on divergences between the Coppock Curve and the price action.

Challenges of using the Coppock curve on intraday charts

The Coppock curve is generally better at catching market bottoms (i.e long term opportunities) as compared to short opportunities as the founder has mainly developed this indicator to identify buying opportunities.

But, the major drawback of the indicator is giving false signals and forcing investors to short or exit their position. The signal could again give a buy signal within a shorter timeframe.  This might create confusion for traders in quick succession.

Below is the three-minute chart for Microsoft on June 29^th, 2016, which is the perfect example of this scenario.

Here you can see that the Coppock curve has been heading downwards as highlighted with the blue trend line. For the same period, you see a range bound or in fact a slightly bullish trend from the Microsoft chart.

After some time, the Coppock curve fell below zero but you don’t see any downtrend in the price activity. After the false signal, the Coppock curve began rallying upwards through the zero line.  As you can see, Microsoft’s price rallied the remainder of the day.

False Coppock Curve Signals

Trading Coppock Curve with the Hull MA

Hence, to avoid these shortcomings in the indicator, let’s combine the Coppock Curve with the Hull MA.

Below is the three-minute chart for Alphabet Inc. (NASDAQ:GOOGL) from June 30^th 2016.

During the second half of the trade, you can see that the Coppock Curve generated a bullish signal by trending above zero and this trend is supported by the Hull MA. Accordingly, we take a position near $698. Both the Hull MA and Coppock Curve maintained their bullish trend till the close of the day at which point we exited the position at $704.34.

Another thing to note in the below chart is that you see a very flat direction from the Hull MA curve during the mid-session of the trading, while the Coppock Curve has been rising above zero and then subsequently falling below zero after some time. Intraday traders can avoid such false signals by taking support from the second indicator of their choice.

Coppock Curve and Hull MA

Trading Coppock Curve with KST

Now let’s combine the Coppock Curve with the Know Sure thing indicator (KST).

We take a look at the three-minute chart of BlackRock, Inc. (NYSE:BLK) from June 30^th, 2016.

In the below image, you can see the bullish crossover in the Know Sure Thing indicator. Consequently, the Coppock Curve generated a buy signal by passing above zero. We take a position at $336.41. After trading more than two hours, we get the first sell signal from the Know Sure Thing indicator. By then the Coppock Curve started trending downwards. Traders could exit their long position here at over $339.

Coppock Curve and KST

Trading Coppock Curve with the MACD

Let’s now combine the Coppock Curve along with the most commonly used trading indicator - MACD to identify any trading opportunities for intraday traders. We take the Goldman Sachs Group Inc. (NYSE:GS) three-minute chart for June 30^th, 2016 and add the Coppock Curve and MACD.

Now, if you see the below chart, we get the first buying opportunity from the MACD crossover at around 11 am.

This trend is also supported by strong volumes.

Consequently, the Coppock Curve crosses above zero strongly confirming the bullish trend.

Accordingly, we take a long position at $146.11. After trading more than two hours, we receive misleading signals from the MACD.

However, the Coppock Curve is still maintaining a strong bullish momentum and maintaining above zero. We book our profit near $148.04 after the Coppock curve falls below zero. By then, the MACD has given the bearish indicator. Intraday traders could exit their position when they see the first signal from the MACD. But this choice depends on their preferred indicators, trading style and investment horizon.

Coppock Curve and MACD

On the other hand, to avoid the confusion in the sell signals (as this is where the Coppock Curve lags), we can use the third indicator to confirm the sell trend based on the trader’s preference.

Conclusion

• The Coppock Curve was developed by Edwin Sedge Coppock in 1965 to identify long-term buying opportunities in the S&P 500 and Dow Industrials.
• A buy signal is generated when the Coppock Curve crosses zero and enters into positive territory, while a sell signal is generated when the Coppock Curve falls below zero and enters into negative territory.
• The Coppock Curve could also be traded based on divergences, but we think it’s not a good idea for intraday traders as this could lead to many false signals.
• The Copper Curve also comes with its own shortcomings and gives a relative weak sell or short position signals as compared to the buy or long positions signal.
• The Coppock Curve could be used by intraday traders to identify the bullish trends. The indicator could also be traded along with Hull MA, Know Sure Thing Indicator and MACD.

The post How to use the Coppock Curve with other Indicators appeared first on - Tradingsim.

False Signals with Technical Indicators

We have discussed many technical indicators on the Tradingsim blog. We have gone through many trading signals and strategies for increasing profit potential. However, nothing in trading is 100% and no one knows for sure the future of price action.

After all, if everyone could predict the trajectory of stock prices, we would all be millionaires and billionaires. The truth is that every technical indicator fails and we all need to know how to handle this reality.

Lagging Indicators

Lagging Indicators give you a confirmation signal. This is why they are called trend confirming, or trend following indicators. The signal from this indicator comes after the event occurred on the chart. In this manner, lagging Indicators “lag” the price action. The most popular lagging Indicators are the SMA and the MACD. These indicators give false signals for sure, but not that often. Let me show you:

Lagging Technical Indicators

Although the simple moving average is a lagging indicator it can also lure you in many losing trades in a row. The image above is the 2-minute chart of Oracle from May 5, 2016. The blue line on the graph is a 30-period simple moving average. This number of periods should reduce the noise; however, look what happens on the chart.

While the price tests our 30-period SMA as a support, it suddenly switches below the indicator. This gives a short signal on the chart. Six periods later, the price switches above the SMA, giving the opposite signal.

Then immediately we see Oracle slip back below and then above the SMA. We see one last false bearish signal before the price breaks the SMA upwards and enters a real trend.

In this example, we saw five false signals in a row caused by a 30-period SMA. Each of these false signals could lead to significant losses when trading on margin.

Now, let me show you a few false MACD signals:

Lagging Technical Indicators 2

Next we have the 2-minute chart of Ford. At the bottom of the chart you will see the MACD indicator, which gives three false signals.

The image starts with a price decrease. At the same time, the MACD indicator creates a bearish crossover. We interpret this as a bearish signal on the chart. However, the price enters a range and then begins to increase.

Later, the price creates two bearish crossovers after the price started increasing. Each of these two signals could be taken as a bearish indication on the chart. However, the price doesn’t start a bearish move and continues higher.

In this example, we have three bearish signals, which could lure us into three false trades in Ford. Each of these trades could bring a number of small losses to our account.

You will often see this type of trading activity during the midday trading session.  If you get caught in these nonsense back and forth price action, you will surely bleed your account.

This is why it is so critical to either lower your profit targets for midday trading or work to identify the small number of volatile issues.

Leading Indicators

These are the indicators which give you the trend signal right in the beginning of the move. This is why they are called leading - because they lead the price action. Isn’t that great? You are able to hop in the trend right in its beginning and ride it all the way up!

However, the leading indicators give many false signals. Two of the most popular leading Indicators are the stochastic oscillator and the relative strength index. These two indicators have their own struggles with accuracy. Let me demonstrate to you:

Leading Technical Indicators

This is the 2-minute chart of Amazon from June 17, 2016. At the bottom of the chart, you see the relative strength index.

The chart begins with a price decrease. At the same time, the RSI is decreasing as well.

Suddenly, the RSI line enters the oversold area. The line then quickly breaks the oversold zone upwards. This gives a long signal on the chart. However, instead of increasing, the price has a small drop. Three periods after the oversold signal, the RSI line enters the oversold zone again. This creates another oversold signal on the chart. Then the indicator breaks the oversold zone upwards, which accounts for the price increase.

This is another strong bullish signal on the chart. Yet, the price stays flat. Meanwhile, the RSI indicator increases slowly. This supports the bullish outcome on the chart. However, the price then ends the range and drops rapidly. If traded, this RSI signal was definitely a loser.

Let’s now review a few false signals from the stochastic oscillator:

False Technical Signals

Above is the 2-minute chart of Oracle from May 9, 2016. At the bottom of the chart is the stochastic oscillator.

The chart starts with a decrease when the stochastic suddenly provides a strong oversold reading.

Furthermore, three times in a row the indicator breaks the oversold area upwards. These are all buying signals; however, the price stays flat. Shortly after the third signal, the price actually falls sharply lower.

This is completely counter to the signals we receive from the stochastic oscillator.

Later we receive strong overbought signals. As you can see, these signals did little to pull down the price of Oracle.

If you are unable to identify when to ignore price signals, you will constantly run into this challenge when trading the markets.

Again, I especially see the manipulation of stock prices during midday trading.  This is when the volume is at its lowest, and smaller traders are able to move stocks higher and lower with ease.

Why Technical Indicators Fail

You should never forget that at their core, technical indicators gather past price data to determine oversold/overbought readings.

The technical data on the chart and the price action in general are formed by the clash of buyers and sellers of the respective stock. If there are more buyers, the price is likely to increase. If there are more sellers, the price is likely to decrease.

But who knows for sure who will win the battle? Nobody! We can only guess. In this manner, technical indicators always imply what might be the possible outcome. They technically cannot be 100% accurate.

Why is Technical Analysis Difficult?

In addition to all the factors we discussed above, we also need to briefly touch on the topic of high frequency trading.  20+ years ago, technical analysis worked somewhat reliably.  Many retail traders would read up on their favorite chart pattern and a good portion of the time, things would play out as intended.

Stocks would easily hit their targets for formations such as head and shoulders pattern or ascending triangles.

Well, fast forward to today and we now have machines placing millions of buy and sell orders every minute.  This in essence makes reading the tape and price action more difficult than ever.

Have you ever noticed how right when you place your order to sell short on a breakdown, the stock will inevitably reverse and go higher?  Even though the formation on the chart was perfect?

This is the reality of the world within which we live now and until our government’s do something about it, it will be the norm for the foreseeable future.

Does Technical Analysis Really Work?

Have you ever experienced downswings in trading? You definitely have!

I would bet many times, you have been lured into losing trades by technical indicators, right? Then you change the indicators you use and your strategy, but it is still not working! Many people who appear to be in this situation simply quit trading and give up. I bet that many times you have asked yourself the question “Does technical analysis really work?” It is normal to have doubts when things are not going your way.

On the web, many so-called “experts” will say “technical analysis is nonsense!” without actually having a clue why. Some people think that if a chart pattern fails once, then it will always fail! Thus, the next time you ask yourself this question simply remember this: technical analysis does work!

However, you never know in which case your technical indicator will give you a valid signal. So, how exactly can a technical indicator for day trading bring you profits? The answer to this question is very simple. You can profit from technical analysis by adding to your strategy the basic concept of risk management.

Risk Management

You should always know the success rate of your trading strategy. At the same time, you can always control the amount you risk with a stop loss order. This means, you have full control over your trading strategy in the long term. You maybe don’t understand this. Let me explain further.

No matter what your strategy or what technical indicator you use, you and only you determine how much you are going to lose per trade.

In this manner, you have to know your edge and figure out what strategy you can use for managing your losses that will result in a positive net return.

Still not believing me?

I have been using the same trading approach with the Nikkei for the last 3 months.  I would have some up days and some down days.  But my consistency was lacking due to the different market conditions and rules on the Nikkei compared to the US market.

Well, one day I decided that enough was enough.  I started to tighten my stops and quit for the day if I was up or down a certain amount.  This discipline regarding how much I risk per trade and per day, has resulted in a win rate on the day of 80%.

Now this does not mean I am winning 80% of my trades, but just that I am able to walk away with cash in my pocket 4 out of 5 trading days.

So again, I ask you, does technical analysis still work?

Conclusion

1. Technical Indicators will fail and fail often.
2. Leading Indicators fail more than lagging indicators.
3. Technical indicators fail because nothing in trading is 100%.
4. Technical analysis and technical indicators do work once you take responsibility for your trading decisions. Remember, you do not have to take every trade.
5. However, to succeed with your trading strategy you need to learn how to properly manage the risk on each trade.

The post Why Do Technical Indicators Fail? appeared first on - Tradingsim.

Overview of the Ulcer Index

The Ulcer Index measures the amount of risk on a trade. Hence the name ulcer for the pain and stress these moves can inflict on the less skilled trader.

In this article, we will test the indicator to see how well it can forecast extremes in the market.

How to Calculate the Ulcer Index

The index is all about calculating the level of risk by looking at how far a stock has fallen from recent highs.

The calculation of the ucer index is a three-step process.

Step 1

Drawdown Percentage = ((Close - Highest Close over 14-periods)/Highest Close over 14-periods)

Step 2

Squared Average = (14-period Sum of Percentage Drawdown Squared)/14

Step 3

Ulcer Index = Square Root of Squared Average

What Does the Ulcer Index Tell Us?

Ulcer Index

The index is a way for you to quickly size-up the level of volatility in a trade at a glance. There are two things that I see slightly differently than the other articles on the internet.

#1 - High Readings = Time to Get Short

There are several blog posts which state that a high reading shows an increased level of risk and should be avoided. I 100% agree with that statement, except why avoid the stock completely?

Why not go with the trend and get short?

For example, it's clear that once you see readings above 40, a stock is in real trouble.

Now, this doesn't mean you should get short right away on a high reading, but rather wait for the stock to rally on light volume and then open a trade.

Since you are short, the high reading means it's actually a low-risk opportunity for you versus if you were long.

#2 - Low Readings Another Short Opportunity

Low Readings Are Short Opportunities

In the above chart, do you see how the low readings present short opportunities?

Again, you can't go out here and just start shorting on every low reading, you will need more confluence from chart patterns and other technical indicators.

Does the Ulcer Index Work Intraday?

The indicator works just as well on an intraday basis as it does on daily and weekly bars.

Below is a chart of the stock ABID. Notice how the indicator tracks the volatility of the stock with the same level of accuracy as the longer timeframe charts mentioned above.

Intraday Price Chart

My Issue with the Indicator

Lagging Indicator

While the indicator will provide an indication of increased price volatility, it is quite delayed.

The reason the above charts appear to nail each top is that there is a 14-day look back period. When you are trading the stocks in real-time it will be very difficult to use the indicator for any forecast purposes.

Too Much Subjectivity

Now don't get me wrong. Any indicator or trading method will require some level of analysis. There simply is no way around it.

However, the ulcer index on one chart can mean an entirely different thing on another. For this reason, I feel the level of mastery required to gain a firm grip on the indicator places too much of a burden when analyzing stocks.

Where the Indicator Works

Where I can see value in the indicator is in simply gauging the volatility of a stock and sizing up broad market behavior.

Using the Ulcer Index as a Volatility Filter

The indicator can do one thing and one thing really well. It can provide you with an excellent volatility indicator.

For me, I do not trade penny stocks or stocks with high volatility.

Why you may ask?

Because honoring my stops is one of my biggest weaknesses. Therefore, trading low volatility stocks prevents me from placing blow up trades.

So, a simple filtering method is to set a maximum amount of the ulcer index that you will trade. For example, if the stock has an ulcer index value of 10 or more you will not place any trades.

Ulcer Index Below 10

This way you are not taking any long positions in a stock that has the potential of causing you real pain.

Assessing The Market

Another way to leverage the indicator is to assess the broad market.

Whether you are a day trader or long-term investor, it's a good idea to have some indication of what the market is up to.

Low-Risk Breakout

Above is a 5-minute chart of the S&P 500 E-mini.

The point I am illustrating above is that you can also use the ulcer index to gauge the level of risk prior to a breakout.

Please note this does not mean the breakout will work, but it lest you know there is a lower level or risk prior to entering the trade.

If you do not trade futures, it's also just good to know the market is moving higher with lower risk.

Why is the risk lower?

Well as you can see before the breakout, the market was flat before showing a sign of strength. This works in your favor because you can now place a tight stop below the recent congestion.

How Can Tradingsim Help?

Tradingsim has the ulcer index in our library of technical indicators. From what I can see, the indicator requires further analysis for you to build a system.

Rules such as thresholds for filtering and specific rules for going long and short.

The post Ulcer Index – How to Forecast Shorts and Filter Volatile Trades appeared first on - Tradingsim.

10-Day Moving Average Overview

The 10-day moving average is one of those indicators that everyone knows about. From the new trader to the 30-year seasoned veteran.

What makes it so popular?

The quick answer is that it's simple to understand and it does an awesome job tracking price movement.

In this article, I will discuss the 10-day moving average and how it applies to trading. The article will have a heavy focus on day trading, but these principles can be applied to any timeframe.

How to Calculate the 10-Day Moving Average

The 10-day moving average is something straight out of elementary school, again which is what makes it so great.

The average is based on the closing price of a security over the last 10 periods.

10-period simple moving average formula

Day 1 Closing Price - 100

Day 2 Closing Price - 102

Day 3 Closing Price - 99

Day 4 Closing Price - 104

Day 5 Closing Price - 103

Day 6 Closing Price - 107

Day 7 Closing Price - 105

Day 8 Closing Price - 110

Day 9 Closing Price - 111

Day 10 Closing Price - 112

Once you add up all of these closing prices and divide them by 10, you get $105.3o. Well now that you feel comfortable with the math, let's complicate things a little.

Different Types of 10-Day Moving Averages

The technical analysis world wouldn't exist if there weren't people trying to make things more complicated. The 10-day moving average is not immune to this problem.

These additional 10-day moving averages go beyond the scope of this post, so I'm not going to do deep dives, but I want to make you are aware of their existence.

10-Day Exponential Moving Average

The exponential moving average uses the SMA as the base of the calculation and then applies a smoothing factor. The EMA is for traders that want to reduce the lag of the simple moving average.

10-Day Weighted Moving Average

The weighted moving average applies more weight to the most recent price action within the formula. It's similar to the exponential, except it's not a smoothing factor. Therefore, you can configure the indicator in terms of which periods you weight the most.

For example, if you want to create more of a lag, you could even place more weight on historical periods and not the most recent.

[Video] How to Add the 10-Period Simple Moving Average to Your Chart

Below is a quick video of how to add a 10-day simple moving average to your chart.

When is the Best Time to Use the 10-Day Moving Average?

The 10-day moving average is a trend following indicator. This means the indicator is not going to tell you where price is headed but rather gives you a visual of how strong a security is trending.

To this point, it's best to use the 10-period moving average to gauge the health of a stock on the move.

Morning Trades

in the morning stocks will trend and trend hard. This is where the 10-period SMA comes in handy. This is because the 10-day moving average keeps you close to the action. If you were to use a 20 or 50-day moving average, it would give the stock too much room to go against you.

The morning is a funny time in the market. Stocks pretty much move in the same patterns.

If a stock is breaking out or down, they will run from the open into the 10:30 am timeframe and at times until 11:30 or so but then something happens.

The volume starts to dry up and the ranges of the periods begin to decrease. This pausing of the action can take shape in the form of sideways action for the remainder of the day or the stock may make a move to test its highs between 1 pm and 2 pm.

Nevertheless, the strong moves are likely done for the day.

10-Period SMA Chart Example

This pattern above of Google is what plays out in the market every day.

As a day trader or active trader, the 10-day moving average trails the price action closely. This ensures that if you are a momentum trader, you are only staying in a position if it is moving in your desired direction.

Once you see the moving average broken to the downside, you can close the position or at a minimum lighten up your size.

Short Example

The moving average works the same on short trades as well.

Short Example

It is literally the same setup, just the inverse.

In this example, GLUU which is a pretty volatile stock had a nice breakdown in the morning. The stock stayed below the 10-period SMA all the way down into that 11:30 am time zone before basing out.

When can the 10-day Moving Average Fail You?

Late Entries on Breakouts

The 10-day moving average is a lagging indicator. This means the indicator will not do you any good in forecasting a major price move. By the time the average catches up to the price, you would have already missed the move.

To this point, you will need to use other technical indicators to determine when to enter a trade such as price action.

So, if you are waiting for a signal from a moving average before entering a morning breakout or breakdown, you will be behind the eight ball.

Sideways Markets

Sideways markets are a slow bleed for trend following systems. The reason being, sideways markets have no real trend. These setups come down to buying support and selling the high.

However, the moving averages within ranges are a mess.

The price will cross the averages multiple times on its move up to resistance and back down to support.

Therefore, it's not a great idea to even base exits on moving average crosses.

10-day moving average

Above is a chart example of UBER. As you can see on this 5-minute chart, once in a trading range, the price action moves above and below the average with ease and does not give any clear direction of which way price will ultimately break.

[Video] Comparison of Different Moving Average Periods

As mentioned earlier in this article, there are different types of averages. But there are also different periods.

A general rule of thumb is that you want to use a shorter time period (1o or less) to gauge short-term moves. That's why, thus far in this article, we have discussed morning trades and momentum setups since we are using the 10-period SMA.

However, if you are looking to trade intermediate trends you will want to use the 20 or even 50-period moving average.

Lastly, if you are looking at long-term trends you will want to bump it up to 100 or even 200 periods.

In the next video, we are going to discuss the differences between the 10-period SMA and 100-period SMA when looking at Netflix. This is a morning breakdown trade.

How Can Tradingsim Help?

If you are interested in trading with the 10-day moving average, try using the indicator within Tradingsim. We have a market replay platform that allows you to trade real data from the past two years, tick-by-tick.

You can then see if the indicator is a good fit for you and your trading style.

The post 10 Day Moving Average – How to Trade with the Indicator [Video] appeared first on - Tradingsim.

VWAP Boulevard has become all the rage in the fintwit community lately. Discovered, named, and taken mainstream by Twitter phenom @team3dstocks, thousands of day traders are now implementing this strategy to trade momentum stocks. In this post, we’ll uncover the long and short of the strategy, plus offer a few helpful real-life vwap boulevard trading examples.

The Mysterious Man Behind VWAP Boulevard

With any good strategy, an edge in the market starts with backtesting. You can either pay for the data and analyze it, or you can spend years collecting your own data as you trade.

Fintwit personality @team3dstocks, who goes by AllDayFaders, is the man who discovered the vwap boulevard strategy through years of collecting his own datasets.

Reading his Twitter posts are lot like getting a noogie from the uncle whose standards you know you can’t live up to. It hurts, the delivery’s a little crass, but you know it’s all true.

Other times, he’s like the older brother or dad you want to imitate. The successful one, giving you the advice you know you need to hear.

Ultimately, he’s very active and benevolent in the daytrading world, doling out his nuggets of wisdom only at the expense of your ego. So be sure to frame your questions wisely, he’s backed up 6 months in responding to his DMs.

In truth, a lot of his posts, especially the #beartipoftheday, can be very helpful and encouraging to anyone striving to be a consistent trader:

How It Got Started

When asked how he finally stumbled upon the strategy, he says “each time a low float ticker had the audacity to hit the scanners, I would add it to my database, then pick it apart after hours.”

“Like a mad scientist,” he goes on to say.

Excel spreadsheets galore. He’d break everything down that he possibly could, “analyze EVERYTHING” about the tickers he saw on the screen.

What is EVERYTHING, you’re wondering?

“The chart, the price action, the SEC filings, the fundamentals, the volume, etc.”

After years of analysis, it eventually led him to the highest volume days on small cap stocks. These securities that had been selling off or consolidating for a period of weeks or months after huge runs, would often gap again in the premarket many weeks or months down the road.

AllDayFaders (ADF) had discovered a pattern.

How to Find the Boulevard

These “penny stocks” as they are known to some, have a tendency to make huge intraday runs from time to time, sometimes doubling, tripling, or more in a single day, only to fade off and close lower the very same day.

Similar in concept to Volume at Price or Anchored VWAP, but slightly different, ADF found that the low floaters hitting his scanners in the morning all had something in common.

They were running into an area of prior volume-weighted price resistance from previous high-volume days.

If he tracked backwards on the daily chart until he ran across a prior high volume run, he could use that day’s intraday vwap as a guide for the current day’s trading levels.

The Result

According to ADF, the probability is around 75-80% accuracy that the stock will run into serious resistance at these levels. And the reaction to the levels will dictate the action he needs to take — going long or short.

Along those lines, ADF has found that 70-80% of the “best faders” die in the premarket.¹. This might be a limiting factor for who can trade these type of securities. But for experienced day traders with the right tools, it can provide a great opportunity to profit before the market opens.

Outside of the premarket hours, ADF admits that the second best time to short extended stocks is “by 10am.” But only if the volume is climactic.

Those are some pretty decent odds for trading. And anyone who trades low float stocks knows how difficult they can be to trade. The temptation is there for quick and massive profits. But the risk of heavy losses looms large.

Knowing that, the #vwapboulevard strategy can be a good tool to increase your odds of success and mitigate risk. Let’s dig a bit deeper into it.

What is the VWAP Boulevard Formula

It’s quite simple actually.

Note that ADF uses and recommends ThinkorSwim for his calculation, so he references TOS a lot. Nonetheless, it can be found on just about any charting platform.

Without further ado:

That’s it.

Essentially identify the intraday vwap level for the prior highest volume days that the stock ran. Draw your line there, then wait for the current premarket or intraday action to reach and react to that level.

A simple formula right? In principle, yes. But that is definitely the simplified version.

GAP Percentage

As a rule of thumb, ADF also recommends only trading extreme gaps of 50% or more.

Years of price action trading experience will likely help as well. After all, you will need to know how to interpret the security’s reaction to these levels and have the discipline to put on a successful trade.

Not to mention being able to handle extreme volatility.

Along these lines, in order to help qualify the trade better, ADF employs a volume forecasting indicator.

What Is a Volume Forecasting Indicator

A volume forecast is essentially a way to predict the “end of day” volume earlier in the trading session, and at different time intervals.

Niv Goren has done a fantastic job of explaining this unique indicator and how to create your own version on his site inthemoneyadds.com. Like others, his inspiration came from AllDayFaders’ influential Twitter posts.

In his blog, Niv describes the step-by-step process of collecting data on prior high-volume, low-float runners, then choosing a predictive model with which to run the calculation. The results are then correlated “between different ratios and end of day results,” he says.

Interpreting Data

Understandably, running calculations like this for different time intervals, collecting the data, and analyzing it all may seem daunting. For that, Niv has created his own indicator that he sells through his site with tips on how to interpret it.

The goal with the indicator, however, is not necessarily to “know” the end-of-day volume. The goal is to understand how quickly the ratio is expanding between current volume and the end of day forecasted volume. Especially at the start of the session.

We then need to ask what this can tell us in relation to vwap boulevard and other factors. How quickly the forecast expands might tell us whether or not the stock may continue squeezing.

Predicting Tops

To understand the timing of his trades better, Niv has plotted a histogram to determine the time frame in which the majority of small cap stocks reach their intraday peak.

Interestingly enough, his findings are in line with AllDayFaders’ “by 10:00am” statistic.

Niv’s site includes a lot of varied and useful data, i.e. where you should cover your short, some special considerations, etc. Click the chart above, it’s worth a read if you have the time.

The last thing worth noting with the volume forecast indicator is how it might forecast float rotation.

Float Rotation

Serious small cap traders pay close attention to float data.

Professional day trader Nate Michaud of InvestorsUnderground.com coined the term after suffering a few losses earlier in his career. Nate describes it as

“the term we use referring to names with tightly held float when it begins to trade two, three, ten times and beyond the listed float causing shorts to ‘add add add’ in disbelief only to send it higher.”

Nate Michaud

So, what exactly does this mean and why is float rotation important?

Essentially, the available shares are being churned rapidly throughout the day. Contextually, if the stock is finding support at vwap boulevard and building sound bases on the way up, this could spell trouble for shorts who are, like Nate says, “add add adding” on the way up.

We’ll see an example of this in a moment.

Suffice it to say, that averaging up or down can be a very dangerous and fast way to lose money.

This goes back to ADF’s warning:

Let’s take some examples from recent months to see how the pattern actually plays out.

VWAP Boulevard Long Examples

In order to visualize this and trade with the correct “boulevard lines,” we’ll take a few examples of longs and shorts at these levels and examine them.

Long Example 1 – SPI

First, let’s jump back in time to the morning of September 23, 2020. We run our premarket scan which includes floats lower than 100m, or small cap stocks. We notice that SPI hits our %gainer list with a 200% gap in the premarket.

Here is a look at SPI’s premarket chart:

The question now is what happens at the open, right?

Sure, we could likely place a trade with the information from this 1-minute premarket chart. There are some key levels in the premarket and so forth.

But why are they significant? Is there more to the story that could help us? There is.

Let’s now zoom out to the daily chart, and try to find our highest volume days.

Daily High Volume Bars

As we can see from prior months, there are a number of really high volume spikes associated with big advances. These are the clues we’re looking for.

As part of your premarket routine, when a stock that fits your criteria hits the scanners, you’ll want to locate these days on the chart.

Now comes the fun part.

You should be able to overlay a vwap indicator and find the intraday vwap levels for each of these days. Most charting platforms will have this. AllDayFaders prefers TOS charts and finds them more accurate.

Adding VWAP Boulevard Lines

If you need to get a little more granular, you can go down to the hourly or 4-hour chart to find the intraday vwap levels for the prior high volume days.

We’ll do this now using the 4-hour chart below.

In the image above, VWAP is the red line. What we’ve done is drawn horizontal lines at these vwap levels that occur during the highest volume days on the chart, typically near the closing vwap price.

As you can see, we have significant volume at $1.70s on the low end, $3.30s, and the $4 area.

!!!Be sure to superimpose the horizontal lines on the smaller time frames you’ll be trading on!!!

Now that our #vwapboulevard lines are drawn, let’s get back to that 1-minute chart and see if these lines come into play with SPI’s premarket price action.

Sure enough, these lines end up being significant. Before the open, we have a test and fail at the upper vwap boulevard at $4, as well as some significant support and resistance with the $3.30 line.

Timeliness

Now, as ADF has stated, “if volume doesn’t fall off a cliff by 10am,” we want to either get out or look for a long setup. If the top line of $4 is our upper vwap boulevard, then we need to see lower prices soon if we are taking this short.

By 9:30am, we are on the “frontside” of the trade. In other words, we are making higher highs and higher lows.

Fast-forwarding to 10am, we see the action getting hotter as volume continues to persist. We put in a double bottom at one of our #vwapboulevard key support areas of $3.35 then retest the red vwap intraday line.

At this point, volume isn’t really breaking down yet, which should give us pause for concern if we are short from the top. At the very least, we’ve identified our stop loss areas depending on our short entries earlier.

Volume Forecast

Likewise, if we have employed the help of the volume forecasting tool, it might be a good time to check in and see what our percentage is, or how quickly we have or have not rotated the float.

On the flip side, bulls may be looking at this for an opportunity here, risking against the key $3.30s line and intraday vwap for a long entry.

Continuing forward in time, let’s see what happens by 10:30am:

In the wise words of Scooby-doo, “ruh roh!”

It was supposed to fail wasn’t it? Volume is increasing. The stock is now up 342% percent. If you’re short, what do you do?

This is the purpose and benefit of the vwap boulevard strategy. Not all the key levels had broken down. Our guides were there giving us information to either cancel our short, or go long.

Who Is Trapped

In light of this, you should step back, look at the big picture now, and ask yourself, “who is trapped?”

That’s the beauty of vwap boulevard, according to ADF. It presents us with another layer of the market in order to hypothesize on this question.

In other words, what is the meta trade? Or, the trade behind the trade. What’s going on in the big scheme of things with buyers and sellers that can give us confidence going long or short.

Using this thought process, whoever was averaged in short at the levels on the chart above are now in deep water.

At this point in the day, SPI has traded 82.1 million shares. It only has 16 million shares in the float. That means it has churned through the available shares over 5x since the day began.

That’s a lot.

Float Rotation

Let’s revisit why this is significant.

As Nate Michaud points out, a float rotation is like a “refresh of shareholders.” As this happens, “the stock’s trading behavior changes.”

In a great blog post on this subject, he gives the example that at each successive level you find new short sellers who replace the ones who’ve blown out at the prior levels.

ADF describes it this way:

Therefore, if longs are in control from below with a better average and a better foothold on the available shares, short sellers are really at their mercy. They are all scrambling for liquidity to cover their shorts.

This adds fuel to the fire as they average up, only to cover higher while the price continues to rise on lower supply. In the meantime, new shorts come in to sell the stock at higher prices believing it is too overbought, yet they are eventually squeezed, too.

The Carnage

Why does ADF recommend getting out of the way if you’re short when this happens near vwap boulevard?

See for yourself:

At $40 those shorts near the $4 vwap boulevard are probably wishing they’d gone long instead. Or at least covered. Wouldn’t you say?

VWAP Boulevard Long Example 2 – EYES

The stock symbol EYES from March 5, 2020 gave us another great example of how important vwap boulevard can be. For the sake of time, I’ve identified the vwap level for the three highest volume bars on the daily below.

These levels occur at $1.70, $2.56, and $3.46, give or take a few cents. Again, this is what you do after you’ve seen EYES hit your small cap scanner in the premarket on considerable volume and %gain.

If you’re going to trade this strategy and don’t have a built-in indicator, you’ll need to draw these lines. At the time of publication, there are a few free vwap boulevard indicators available now, from scriptstotrade.com and thevwap.com.

The Premarket

Now, let’s look at the premarket:

Notably, EYES hit resistance at the $2.50s level and gets rejected in the premarket. But like our SPI example above, it isn’t putting in lower lows yet.

ADF makes a note of this rejection on his Twitter feed on this day, calling out the exact levels we’ve drawn above:

Later that week, a follower of ADF notes the other level of $3.45 that we also identified above. It was a lower volume day, which ADF claims would likely have been less significant.

For this reason, we should assume that the $2.56 level was the key for our long or short thesis, but could still expect some turbulence at the $3.45 level if it got there.

Obviously this is Long Example 2, so there is no spoiler that the stock went higher. Let’s check out the move it made.

Before we see the whole day, let’s pause here at 10:10am.

The Crossing

Like SPI, VWAP Boulevard couldn’t stop the bulls from crossing — no pun intended. And as we know that most of these should fail by this hour of the morning session, it was time to cover and walk away if you were short.

To that end, ADF tweeted at 10:10am with this exact warning: “Stop out immediately.”

Wise words from the master himself, as EYES ripped higher throughout the day, all the way to $10 before noon.

Outlier Moves

We call these outlier moves. They happen from time to time. Nate Michaud does a great job explaining the thesis and fundamentals behind these moves in a great YouTube video.

For all intents and purposes, at 500% in a single day, EYES was definitely an outlier move.

Before we move on to shorts, take another look at the last line we have drawn at the $3.46 level for EYES (the upper black line). As mentioned above, this area was a bit of a last resort for shorts from a prior day’s vwap.

It offered one more opportunity to trap shorts and then simply grinded higher.

And there you have the long side of the story.

Disclaimer

The above examples are outlier examples of what CAN happen. Not all low float stocks will make huge moves like this.

Keep that in mind and trade at your own risk.

Long Recap

• Identify gappers in the premarket (ideally 50%+)
• Filter by float size (smaller caps)
• Target stocks with enough liquidity (volume)
• Zoom out on the daily or hourly to find high volume days
• Draw horizontal lines on the highest volume day’s vwap
• Go long if vwap boulevard becomes support

VWAP Boulevard Short Examples

VWAP Boulevard wouldn’t be what it is without his namesake, AllDayFaders. After all, the larger percentage of these stocks fade hard after reaching their peak in the premarket, or by 10am.

With that in mind, let’s glean what we can from two real-life examples.

Short Example 1 – VCNX

Fading all day was certainly the case with VCNX on February 19, 2021.

Since we have already discussed how to find and set lines for vwap boulevard, we’ll just show the daily chart with them already plotted to get started.

The Premarket

As can be seen in the next image, VCNX was gapping nicely in the premarket on heavy volume. By 9:30am EST, it was up over 100%.

However, it had not yet reached vwap boulevard:

This doesn’t mean that it is guaranteed to run into vwap boulevard. Obviously, there are no guarantees in the market.

Nonetheless, if this stock is on your radar from the premarket scan, you want to be aware of the key levels it could run to. If you’re watching multiple stocks or positions, price alerts can give you a heads up if it decides to rip higher without your eyes on it.

With levels set, if we get an exhaustive move into this prior resistance level, it could signal a short.

Replay

Let’s watch the quick replay:

With the help of bulls that morning, VCNX arrived right on time at our VWAP Boulevard level. 10am literally marked the top.

In the replay, at vwap boulevard you see a huge exchange of shares on the levell II. As noted in many of our other posts, this is a classic example of effort vs. result, and exhaustion.

Long chasers were literally handing there shares over to short sellers who were absorbing the upward momentum. After one last push above vwap boulevard, the trend changed.

We get a red “kill candle” as bulls walk away and bears go looking for “blood,” as ADF would say.

The rest is history.

Float Rotation

As a side note, VCNX had a float of around 15 million. By 10am that morning, it had already surpassed 100 million shares traded.

From the image above, it is quite clear that the majority of the shares traded occurred during the initial bull run to vwap boulevard. As ADF notes, the ideal “all day fader” will trail off considerably after 10am.

At that point, the momentum is lost, giving bears the confidence to ride it down.

Do yourself a favor: save your spot here and scroll up to compare the volume after 10am on the VCNX chart with the volume post 10am on the EYES chart above.

When To Cover

Returning for a moment to our discussion of Niv Goren and his analysis, we can find more data regarding the low of the day. This should help us with predicting a time to cover our short position.

According to Goren, a majority of these small cap / low float securities that fail according to plan will put in their ultimate lows in the last 30 minutes of the trading day.

Niv’s article is worth a read as it outlines several key points that line up with ADF’s predictions, along with a few special circumstances that Goren backtested.

Generally speaking, this data makes sense of ADF’s strategy for holding these particular securities for the entire day as they are statistically more likely to make new lows by the end of the session.

VWAP Boulevard Short Example 2 – XSPA

For our last security, we’ll pick a premarket #vwapboulevard example. As ADF notes, stocks that reach this level and fail in the premarket are usually the most reliable all day faders.

XSPA did just that on March 8, 2021.

Per our premarket routine: once the security hits our premarket scanner, we pull up the daily chart and identify the prior highest volume days.

In this instance, using the January 28 intraday vwap level, we draw our line at $2.71

Once the lines are drawn, we head back to the premarket to plan our trade and see how it reacts to the levels.

With uncanny accuracy, the level proves worthy to short as bears reject the upward momentum and defend their boulevard. The stock never recovered and proceeded to sell off the entire day.

And that is the short side of it.

Disclaimer

The above examples are typical examples of what CAN happen on the short side. Not all low float stocks will fade all day. There may be times when stocks squeeze end of day.

Keep that in mind and trade at your own risk.

Short Recap

• Identify gappers in the premarket (ideally 50%+)
• Filter by float size (smaller caps)
• Target stocks with enough liquidity (volume)
• Zoom out on the daily or hourly to find high volume days
• Draw horizontal lines on the highest volume day’s vwap
• Go short if vwap boulevard becomes resistance and trend reverses
• Look for heavy volume before 10am and volume to fade off afterward

Considerations

There is a lot to consider with this unique strategy. Hopefully this guide has united a lot of the data for you and how it all comes together. It is certainly a more advanced day trading strategy for those comfortable with the nature of small cap securities and the volatility associated with them.

That being said, there are few points worth considering when shorting this type of strategy:

1. Not all of these securities will be easy to borrow for shorting.
   1. Access to borrowing shares may be limited to certain brokers.
   2. Locating shares to short will have a cost associated.
      
2. Trading the premarket can be risky without the right tools.
   1. The ability to use hotkeys for faster buy and sell orders may help.
   2. Liquidity issues can create highly volatile price movements.
   3. Lack of liquidity can create issues with large order fills.
   4. Stock offerings and other news releases can happen anytime.
      
3. Stock halts happen frequently with volatile, low-float stocks.
   1. Depending on the halt criteria and opening price, this could result in substantial losses.

How To Find More Information

@team3dstocks has a wealth of knowledge in his tweets. He is often asked questions, but recommends simply doing a search for his tweets using Twitter search tools. Rest assured you’ll likely find an answer this way.

For example, a simple search of #vwapboulevard or #beartipoftheday will turn up a myriad of tweets on the subject. On that token, he is usually good about tagging his tweets for the very purpose of finding specific information — even for specific ticker symbols.

Here is an example of results for a quick search using #vwapboulevard:

Regardless of all the information, it takes practice and time to become acquainted with the strategy and nuances of trading it with real money.

How To Practice #vwapboulevard

As always, we are big proponents of putting strategies to work in a realistic environment without the risk. Once you have a solid dataset of successful simulation trades, you can try your hand with real money.

Just know that emotions will affect your performance more often than not. It is for that reason that simulator training can be a great tool to increase your learning curve on what to expect before employing actual cash.

Here’s to good fills. And remember, look both ways when crossing the #vwapboulevard!

The post VWAP Boulevard Indicator: The Ultimate Guide [#vwapboulevard] appeared first on - Tradingsim.

Bollinger Bands are a powerful technical indicator created by John Bollinger. The bands encapsulate the price movement of a stock, providing relative boundaries of highs and lows. The crux of the Bollinger Band indicator is based on a moving average that defines the intermediate-term “trend” based on the time frame you are viewing.

But how do we apply this indicator to trading and what are the strategies that will produce winning results?

In this post we’ll provide you with a solid foundation on the bands, plus six trading strategies you can test to see which works best for your trading style.

But before we do, check out this quick tutorial as a primer for the more advanced concepts discussed below.

Bollinger Bands Overview

Most stock charting applications use a 20-period moving average for the default settings. The upper and lower bands are then a measure of volatility to the upside and downside. They are calculated as two standard deviations from the middle band.

Bollinger Bands Calculation: ^[1]

Upper Band = Middle band + 2 standard deviations

Middle Band = 20-period moving average (most charting packages use the simple moving average)

Lower Band = Middle band – 2 standard deviations.

The below chart illustrates the upper and lower bands.

In essence, the Bollinger Band indicator was created to contain price the vast majority of the time. In fact, Investopedia claims that the bands actually contain the price 90% of the time ^[2].

It is rare for a security to trade outside of the bands. For this reason, it can be used to find an edge in the market.

What is the Ideal Bollinger Bands Settings?

Regardless of the trading platform, you will likely see a settings window like the following when configuring the indicator.

If you are new to trading, you are going to lose money at some point. This process of losing money often leads to over-analysis. While technical analysis can identify things unseen on a ticker, it can also aid in our demise as traders.

In the old days, there was little to analyze. Therefore, you could tweak your system to a degree, but not in the way we can continually tweak and refine our trading approach today.

We make this point in regard to the settings of the bands. While the configuration is far simpler than many other indicators, it still provides you with the ability to run extensive optimization tests to try and squeeze out the last bit of juice from the stock.

The problem with this approach is that after you change the length to 19.9 (yes people will go to decimals), 35 and back down to 20; it still comes down to your ability to manage your money and book a profit.

Our strong advice to you is not to tweak the settings at all. It’s better to stick with 20, as this is the value most traders are using to make their decisions, versus trying to look for a secret setting.

Now that we have covered the basics, let’s shift our focus over to the top 6 Bollinger Bands trading strategies.

Bollinger Band Trading Strategies

Many of you have heard of the classic technical analysis patterns such as double tops, double bottoms, ascending triangles, symmetrical triangles, head and shoulders top or bottom, etc.

Bollinger Bands can add that extra bit of firepower to your analysis by assessing the potential strength of these formations.

Let’s unpack each strategy, so you can identify which one will work best with your trading style.

#1 Strategy – Double Bottoms

A common Bollinger Band strategy involves a double bottom setup.

John himself stated ^[3], “Bollinger Bands can be used in pattern recognition to define/clarify pure price patterns such as “M” tops and “W” bottoms, momentum shifts, etc.”

The first bottom of this formation tends to have substantial volume and a sharp price pullback that closes outside of the lower Bollinger Band. These types of moves typically lead to what is called an “automatic rally.” The high of the automatic rally tends to serve as the first level of resistance in the base building process that occurs before the stock moves higher.

After the rally commences, the price attempts to retest the most recent lows that have been set to challenge the vigor of the buying pressure that came in at that bottom.

Many Bollinger Band technicians look for this retest bar to print inside the lower band. This indicates that the downward pressure in the stock has subsided and there is a shift from sellers to buyers. Also, pay close attention to the volume; you need to see it drop off dramatically.

Above is an example of the double bottom outside of the lower band which generates an automatic rally. On the secondary test, TRCH tested a new low with a 40% drop in traffic from the last swing low. Also, the candlestick struggled to close outside of the bands.  This led to a sharp 100% rally over the next day.

#2 Strategy – Reversals

Another simple, yet effective trading method is to fade stocks when they begin printing outside of the bands.  We’ll take this one step further and apply a little candlestick analysis to this strategy.

For example, instead of shorting a stock as it moves up through its upper band limit, wait to see how that stock performs.  If the stock goes parabolic or gaps up and then closes near its low while near the outside of the bands, this is often a good indicator that the stock will correct on the near-term.

You can then take a short position with three target exit areas depending on where the stock finds support: (1) upper band, (2) middle band or (3) lower band.  

Using the same chart from above, we can see that the rally off the first low created a near term overbought scenario.

As you can see from the chart, the first red candle after the highs was a bearish engulfing candle.  The stock quickly rolled over and took an almost 5% dive in under 30 minutes.

#3 Strategy – Riding the Bands

The single biggest mistake that many Bollinger Band novices make is that they sell the stock when the price touches the upper band or buy when it reaches the lower band.

Bollinger himself stated a touch of the upper band or lower band does not constitute a buy or sell signal. In his book, John states, “During an advance, walking the band is characterized by a series of tags of the upper band, usually accompanied by a number of days on which price closes outside of the band.” ^[4]

Look at the example below and notice the tightening of the bands right before the breakout.

To the earlier point, price penetration of the bands alone cannot be a reason to short or sell a stock.

Notice how the volume exploded on the breakout and the price began to trend outside of the bands; these can be hugely profitable setups if you give them room to fly.

Notice above in the AMC chart (#3 Strategy) how the Bollinger price expanded on the early breakout.

It immediately reversed with an engulfing candle pattern, and all the breakout traders were head-faked. Along these lines, you don’t have to squeeze every penny out of a trade. Wait for some confirmation of the breakout and then go with it. If you are right, it will go much further in your direction. Notice how the price and volume broke when approaching the head fake highs (red line).

The Middle Band

Just as a reminder, the middle band is set as a 20-period simple moving average in many charting applications.

The middle line can represent areas of support on pullbacks when the stock is riding the bands. You could even increase your position in the stock when the price pulls back to the middle line.

Regarding identifying when the trend is losing steam, failure of the stock to continue to accelerate outside of the bands indicates a weakening in the strength of the stock. This would be a good time to think about scaling out of a position or getting out entirely.

#4 Strategy – Bollinger Band Squeeze

Another trading strategy is to gauge the initiation of an upcoming squeeze.

John created an indicator known as the band width. This Bollinger Band width formula is simply (Upper Bollinger Band Value – Lower Bollinger Band Value) / Middle Bollinger Band Value (Simple moving average).

The idea, using daily charts, is that when the indicator reaches its lowest level in 6 months, you can expect the volatility to increase. This goes back to the tightening of the bands that I mentioned above. This squeezing action of the Bollinger Band indicator often foreshadows a big move.

You can use additional signs such as volume expanding, or the accumulation distribution indicator turning up.

These other indications add more evidence of a potential Bollinger Band squeeze.

We need to have an edge when trading a Bollinger Band squeeze because these setups can head-fake even the best of us.

Example 1

To the point of waiting for confirmation, let’s look at how to use the power of a Bollinger Band squeeze to our advantage.  Below is a 5-minute chart of NIO.  Notice how leading up to the morning gap down the bands were extremely tight.

Now some traders can take the elementary trading approach of shorting the stock on the open with the assumption that the amount of energy developed during the tightness of the bands will carry the stock much lower.  Another approach is to wait for confirmation of this belief.

So, the way to handle this sort of setup is to (1) wait for the candlestick to come back inside of the bands; (2) make sure there are a few inside bars that do not break the low of the first bar; and (3) short on the break of the low of the first candlestick.

Example 2

Based on reading these three requirements you can imagine this does not happen very often in the market, but when it does, it’s powerful.  The below chart depicts this approach.

Example 3

Now let’s look at the same sort of setup but on the long side.  

Below is a snapshot of NIO from October 29, 2020. Notice how NIO gapped up over the upper band on the open, had a small retracement back inside of the bands, then later exceeded the high of the first candlestick.  These sorts of setups can prove powerful if they end up riding the bands.

#5 Strategy – Snap Back to the Middle of the Bands

This strategy is for those of us who like to ask for very little from the markets. Essentially you are waiting for the market to bounce off the bands back to the middle line, which carries a high winning percentage over time.

In this setup, you are not obsessed with getting in a position for it to swing wildly in your favor. Nor are you looking to be a prophet of sorts and try to predict how far a stock should or should not run.

By not asking for much, you will be able to safely pull money out of the market on a consistent basis and ultimately reduce the wild fluctuations of your account balance, which is common for traders that take big risks.

The key to this strategy is waiting on a test of the mid-line before entering the position.  You can increase your likelihood of placing a winning trade if you go in the direction of the primary trend and there is a sizable amount of volatility.

As you can see in the above example, notice how the stock had a sharp run-up, only to pull back to the mid-line.  You would want to enter the position after the failed attempt to break to the downside.

You can then sell the position on a test of the upper band.  If you have an appetite for risk, you can ride the bands to determine where to exit the position.

#6 Strategy – Trade Inside the Bands

This is our favorite of the strategies.

Most of the money to be made in the market, with minimal risk, is in the margins.

The same way we say football is a game of inches, trading is the same.

You, of course, can make a ton of money placing big bets, but these types of traders usually do not make it over a long trading career (20+ years).

Example

First, you need to find a stock that is stuck in a trading range. The greater the range, the better.

Now, looking at this chart, you may feel a sense of boredom overcoming you. That’s because it’s far more entertaining to tell yourself and others you crushed a 20% day trade in one day.

However, from experience, the traders that take money out of the market when it presents itself, are the ones sitting with a big pile of cash at the end of the day.

In the above example, simply buy when a stock tests the low end of its range and the lower band. Conversely, you sell when the stock tests the high of the range and the upper band.

Bands Help Identify Ranges

The key to this strategy is a stock having a clearly defined trading range. This way you are not trading the bands blindly but are using the bands to gauge when a stock has gone too far.

You could argue that you don’t need the bands to execute this strategy. However, by having the bands, you can validate that a security is in a flat or low volatility phase, by reviewing the look and feel of the bands.

A simpler way of saying this is that the bands help validate that the stock is stuck in a range.

So, instead of trying to win big, you just play the range and collect all your pennies on each price swing of the stock.

What if the Bands Fail?

This section is going to feel like a nice cold splash of water right in your face.

Surely you didn’t think Bollinger Bands would paint this rosy picture of trading bliss, did you?

Like anything else in the market, there are no guarantees. No doubt, Bollinger Bands can be a great tool for identifying volatility in a security, but it can also prove to be a nightmare when it comes to newbie traders. Don’t skip ahead, but I will touch on this from my personal experience a little later in this article.

Like any other trade signal, you will need to exit your position without reservation.

Not exiting your trade can almost prove disastrous as three of the aforementioned strategies are trying to capture the benefits of a volatility spike.

For example, imagine you are short a stock that reverses back to the highs and begins riding the bands. What would you do?

Let me help you out if you are confused – kill the trade!

While bands do a great job of encapsulating price movement, it only takes one extremely volatile stock to show you the bands are nothing more than man’s failed attempt to control the uncontrollable.

While there is still more content for you to consume, please remember one thing – you must have stops in place!

Which Strategy Works Best?

This is the important question for anyone reading this article. But it is such a tough question to answer.

To that end, I’ll offer my own personal experiences. For me, there are two strategies that I prefer to use – 5 and 6.

This doesn’t mean the others might not work well for you. But we all have different personalities and trading styles.

Both of these work well, but in two very different types of markets.

Strategy #5 – Snap Back to the Middle of the Band

This Strategy will work in very strong markets. It affords you the flexibility of jumping on a hot stock while lowering your risk as you wait for the pullback.

I have been a breakout trader for years. But I will be the first to tell you that most breakouts fail. Not to say pullbacks are without their issues, but you can at least minimize your risk by not buying at the top.

Strategy #6 – Trade Inside the Bands

This approach will work well in sideways markets and will also have a high winning percentage.

How do I know it has a high winning percentage?

Because you are not asking much from the market in terms of price movement. From my personal experience of placing thousands of trades, the more profit you search for in the market, the less likely you will be right.

Now, while strategies 5 and 6 work best for me, what say you?

Since trading is a personal journey, we’ve created this strategy/profile matrix to help you uncover which might work best for you.

Strategy Profile Matrix

1. Strategy #1 Double Bottom – for the pure technician.  The trader that is going to scan the entire market looking for a particular setup. It will require a lot of patience to identify the setup since you need the second bottom to breach the bands to generate a powerful buy signal.
   
2. Strategy #2 Reversals – calling all risk takers! This approach is fantastic when you get it right because the reversal will pour money into your account. However, get things wrong, and the pain can often leave you paralyzed from taking any action. You must be quick on your toes and willing to cut a loser without blinking.
   
3. Strategy #3 Riding the Bands – for the home run hitters. You must have the sheer will to only average a 20% to 30% win ratio because you will make all of your money on the big moves. That sounds easy, doesn’t it? Well, I have tried systems that have low win percentages, and I have failed every time. This is because I am a sore loser. Therefore, I can’t handle being wrong that infrequently. So, if you want to take less action and can seriously handle being wrong eight out of ten times, this system will be perfect for you.
   
4. Strategy #4 The Squeeze – this is the best setup for the traders that want the profit potential of riding the bands but can take quick money as things go in your favor. You can take one of two approaches with the squeeze strategy. For the riskier traders, you can jump in before the break and capture all of the gains. More conservative traders can wait for the break and then look for a pullback setup in the direction of the primary trend.
   
5. Strategy #5 Playing the Moving Average – this is for the dip buyers. You are looking for stocks that are trending strongly and then react back to the 20-period moving average. This setup works lovely when day trading the Nikkei and usually develops a little after forty-five minutes into the session.
   
6. Strategy #6 Trading the Range – for the edge traders. For me, it comes down to the simple fact markets are range bound 80% of the time. So, if you need thrills, this strategy will put you to sleep. You will likely want to focus on #2, #3, or #4.

Bollinger Bands and Cryptocurrencies

In addition to strategies, there are a few items related to bands I need to cover that will provide you with a full picture of the indicator.

Don’t worry; I’m not about to go on a history lesson on cryptocurrencies with details of where David Chaum went to college.

Instead, I want to center this piece of the article on how you can use bands to trade bitcoin.

Bitcoin Volatility

I was reading an article on Forbes, and it highlighted six volatile swings of bitcoin starting from November 2017 through March 2018. The swings vary from gains of 223% to losses of 40%.

Doing my research, I looked at some of these price swings of Bitcoin in the Tradingsim platform.

These price swings are breathtaking!

Let’s dig deeper into this price action by looking at the charts.

Let’s look at the period of December 22, 2017, to December 27, 2017. During this period, Bitcoin ran from a low of 12,265 to a high of 16,545. This represents a run of ~35%.

Surprisingly, these gains were largely made over three days’ worth of trading.

That kind of money that fast can be hard to grasp. The psychological warfare of the highs and the lows become unmanageable.

So, it got me thinking, would applying bands to a chart of bitcoin futures have helped with making the right trade?

I indicated on the chart where bitcoin closed outside of the bands as a possible turning point for both the rally and the selloff. But let’s be honest here, this is a 60-minute chart of a highly volatile security.

You must honestly ask yourself if you will have the discipline to make split-second decisions to time this trade, just right.

The one thing the bands manages to do as promised is contain the price action, even on something as wild as bitcoin.

Daily Price Chart

As you can see, the 60-minute chart is busy, so let’s take things up to the daily level.

For this example, let’s review the rally from the low of 5,980 on 2/6/2018 to a swing high of 11,785 on 2/20/2018.

I honestly find it hard to determine when bitcoin is going to take a turn looking at the bands. This chart is illustrating a 97% run over an 11-day period.

It’s not that the bands are doing anything wrong or not working. Bitcoin is just illustrating the harsh reality when trading volatile cryptocurrencies that there is no room for error.

I do not trade bitcoin. But after looking at the most recent price swing using bands, a couple of things come to mind:

1. Honor your stops. Sometimes we talk ourselves into thinking that “things will work out,” but with volatile securities, you are essentially gambling.
2. Only invest money you are willing to lose. Losing should never be your goal, but you shouldn’t risk your home or life savings trading cryptocurrencies.
3. Short with caution. Cryptocurrencies can go on massive runs in a short period, so you need to make sure you honor those stops and have enough cash on hand to avoid margin calls.

Combining Bollinger Bands and Bollinger Bands Width

Pairing the Bollinger Band width indicator with Bollinger Bands is like combining the perfect red wine and filet mignon.

In the previous section, we talked about staying away from changing the settings. Well, if you think about it, your entire reasoning for changing the settings in the first place is in hopes of identifying how a security is likely to move based on its volatility.

A much easier way of doing this is to use the Bollinger Bands width. In short, the BB width indicator measures the spread of the bands compared to the moving average to gauge the volatility of a stock.

Why is this important to you?

Essentially, you have an actual reading of the volatility of a security. You can then look back over months or years to see if there are any repeatable patterns of how price reacts when it hits extremes.

Example

To see this in action, look at the below screenshot using both the Bollinger Bands and Bollinger Band width.

Notice how the Bollinger Bands width tested the .0087 level three times. The other point of note is that on each prior test, the high of the indicator made a new high, which implied the volatility was expanding after each quiet period.

As a trader, you need to separate the idea of a low reading with the Bollinger Bands width indicator with the decrease in price. Remember, Bollinger Band width is informing you that a pending move is coming, the direction and strength are up to the market.

In this example, the 5-minute chart ofSciclone Pharmaceuticals (SCLN) had a huge runup from $9.75 to 11.12.

If you had just looked at the bands, it would be nearly impossible to know that a pending move was coming. You would have no way of knowing that .0087 was a level that existed, let alone a level that could trigger such a large price movement.

This is just another example of why it’s important to pair Bollinger Bands with other indicators and not use it as a standalone tool.

Can Bollinger Bands Predict Huge Price Moves?

This is always a fun question: Can an indicator somehow provide you clues of a major price swing?

With the bull market in full force in 2018, volatility dropped to a multi-year low.

The above chart is of the E-Mini Futures. I want to dig into the E-Mini because the rule of thumb is that the smart money will move the futures market which in turn drives the cash market.

It is probably a little hard to see the explosion in volatility at the top of this chart, so let’s zoom in a bit.

Looking at the chart of the E-mini futures, the peak candle was completely inside of the bands. Other than the fact the E-mini was riding the bands for months, how would you have known there was a big break coming?

Now that I have built up tremendous anticipation let’s see if there is a way to identify an edge.

Remember in Chapter 4, the Bollinger Band width can give an early indication of a pending move as volatility increases.

In the above example, the volatility of the E-Mini had two breakouts prior to price peaking. First, the Bollinger Band width had been coiling for approximately five months before breaking out.

If that wasn’t enough to convince you, then the second break above the 8-month swing high of the Bollinger Band width indicator was your second sign.

After these early indications, the price went on to make a sharp move lower and the Bollinger Band width value spiked.

Applying Bollinger Bands to a Volatility Indicator

The inspiration for this section is from the movie Teenage Mutant Ninja Turtles, where Michelangelo gets super excited about a slice of pizza and compares it to a funny video of a cat playing chopsticks with chopsticks.

The point is, it’s so far out there you have to actually try it out to see if it works.

To this point, we applied bands to the Proshares VIX Short-Term Futures to see if there were any clues before the major price movement we discussed earlier.

Does anything jump out that would lead you to believe an expanse in volatility is likely to occur?

Look hard and resist the urge to scan a few inches down the page for the answer.

It’s clear that the VIXY had a breakout by 2/2/2018. But at this point, you would have missed a large portion of the initial breakdown in price.

Being Late

When you are trading in real-time, the last thing you want to do is show up late to the party. More times than not, you will be the one left on cleanup after everyone else has had their fun. In other words, you’ll be left holding the bags.

It was very subtle, but you can see how the bands were coiling tighter and tighter from September through December. During this time, the VIXY respected the middle band.

There was one period in late November when the candlesticks slightly jumped over the middle line. But there was no follow through and it immediately rolled over.

However, in late January, you can see the candlesticks not only closed above the middle line but also started to print green candles.

One could argue that this wasn’t enough information to make a trading decision. And that might be a fair statement.

You would need a trained eye and have a good handle with market breadth indicators to know that this was the start of something real.

There was one other clue on the chart. Can you see it?

This one is a little more obvious and it’s the pickup in volume.

There is the obvious climactic volume which jumps off the chart, but there was a slight pickup in late January, which was another indicator that the smart money was starting to cash in profits before the start of the correction.

Helpful Bollinger Bands Resources and My Personal Experience with Bollinger Bands

Before we jump into my personal experience, look at the below infographic titled ’15 Things to Know about Bollinger Bands’.

The information contained in the graphic will help you as a reminder of the strategies we’ve discussed, plus give you more ideas and resources.

My Journey with the Bands

It’s safe to say Bollinger Bands is probably one of the most popular technical indicators in any trading platform.

If memory serves me correctly, Bollinger Bands, moving averages, and volume were my first indicators as a beginner trader.

Nowadays, I no longer use bands in my trading.  That doesn’t mean they can’t work for you, but my trading style requires me to use a clean chart.

So, why did I end up abandoning the bands?

I tend to over analyze setups; it’s just what I do.

Therefore, the more signals on the chart, the more likely I am to act in response to a signal. This is where the bands expose my trading flaw.

For example, if a stock explodes above the bands, what do you think is running through my mind? You guessed right, sell!

The stock could just be starting its glorious move to the heavens, but I am unable to mentally handle the move because all I can think about is the stock needs to come back inside of the bands.

Day Trading in 2007

Flashback to 2007, when I was just starting in day trading; I had no idea what I was doing.

Instead of taking the time to practice, I was determined to turn a profit immediately and was testing out different ideas.

One of the first indicators I put to the test was Bollinger Bands.

Why? It’s one of the most popular indicators.

I decided to scalp trade. I would sell every time the price hit the top bands and buy when it hit the lower band. It’s really bad, I know. Shaking my head….

From what I remember, I tried this technique for about a week, and at the end of this test, I had made Tradestation rich with commissions.

The key flaw in my approach was that I did not combine the bands with any other indicator. This left me putting on so many trades that at the end day my head was spinning.

What it Takes to Trade with Bollinger Bands

To truly harness the power of the indicator, you need to learn how the bands interact with the price of a security. At the end of the day, bands are a means for measuring volatility. So, it’s not something you can just pick up and use for buy and sell signals.

Just as you need to learn specific price patterns, you also need to find out how bands respond to certain price movements.

This ability to identify the setups will help you avoid the false signals from the real ones.

This level of mastery only comes from placing hundreds, if not thousands of trades in the same market.

Bollinger Bands in the Trading Community

I went onto Amazon to search for the most popular books to see who the leaders are in the space.

No surprise, John Bollinger had the most popular book – “Bollinger on Bollinger Bands.”

The thing that surprised me is that I couldn’t find many other famous authors or experts in the space. I’m not sure if this is because there aren’t many people interested or if other traders stay out of the bands arena because John is so actively evangelizing his own indicator.

The books I did find were written by unknown authors and had less material than what I have composed in this article. The other hint that made me think these authors were not legit is their lack of using the registered trademark symbol after the Bollinger Bands title, which is required by John for anything published related to Bollinger Bands.

Conversely, when I search on Elliott Wave, I find a host of books and studies both on the web and in the Amazon store.

I am still unsure what this means exactly.  With there being millions of retail traders in the world, I have to believe there are a few that are crushing the market using Bollinger Bands.

I just struggled to find any real thought leaders outside of John. I write this not to discredit trading with bands, just to inform you of how bands are perceived in the trading community.

What are the Best Time Frames for Trading with Bollinger Bands?

Bollinger Bands work well on all time frames. Remember, price action performs the same, just the size of the moves are different.

What are the Best Markets for Bollinger Bands?

Without a doubt, the best market for Bollinger Bands is Forex.  Currencies tend to move in a methodical fashion allowing you to measure the bands and size up the trade effectively.

Next, I would rank futures because again you can begin to master the movement of a particular contract.

Last on the list would be equities. The captain obvious reason for this one is due to the unlimited trading opportunities you have at your fingertips.

It’s one thing to know how the E-mini contract will respond to the lower band in a five-day trading range.

It’s another thing to size up one stock from another in terms of how it will respond to the bands.

Conclusion

These are but a few of the great methods for trading with bands.

The key point to remember is that Bollinger Bands gets you into the habit of thinking about volatility.

In order to take your Bollinger Bands trading strategies to the next level, we recommend the following:

1. Settle on a market you want to master (i.e., futures, equities, forex). If you try to learn all three at the same time, you are going down a painful road.
2. Figure out what time frame works best for you.
3. Learn to master one strategy before attempting to tackle them all. Any of the strategies mentioned can work given the right market environment and your willingness to honor your trading plan. However, similar to points one and two above, learn how to focus on getting one thing right before complicating things.

To practice the Bollinger Bands trading strategies detailed in this article, please visit our homepage at Tradingsim.com.

We provide a risk-free environment to practice trading with real market data over the last 3 years.

To continue your research on the Bollinger Bands indicator, please visit John Bollinger’s Official website. Here you will see a number of detailed articles and products.

External References

1. Bollinger Bands Formula. Wikipedia
2. Bollinger, John. Bollinger Bands Rules [Blog Post]. Bollingerbands.com
3. Hayes, Adam. (2019). Bollinger Band Definition [Blog Post]. Investopedia.com
4. Bollinger, John. (2002). ‘Bollinger on Bollinger Bands‘. The Mc-Graw Hill Companies, Inc. p. 113

The post 6 Bollinger Bands® Trading Strategies + Video appeared first on - Tradingsim.

Most anchored vwap strategies are centered around swing trading. However, the strategies used on daily charts can also become major support or resistance for day traders.

In this post, we’ll show you how to develop your edge with three anchored vwap strategies and explain the theory behind the indicator. But before we do, take a moment to watch the video below on how to apply this indicator to your trading tool belt.

VWAP vs. Anchored VWAP

What’s the difference between the two?

VWAP

For starters, you need some understanding of what vwap is. It stands for the volume weighted average price. As a lagging indicator, it tells you where the majority of buys and sells for any given ticker have occurred on average as price evolves throughout the day.

It’s generally used for day trading.

As an example, imagine a stock that runs from $2-$5 and then regresses to $2 by the end of the day. If the majority of the volume came at the highs, then your vwap indicator will likely remain high on the day’s close. Whereas, a simple moving average will fluctuate more as it is based only on the price.

Notice in the image above, the red vwap is much smoother than the yellow 50 moving average. The addition of volume in the formula adds a different weighting element than moving averages.

For a deep dive on vwap, be sure to check out our ultimate guide on the subject.

Anchored VWAP

How the two differ involves the anchor. VWAP is a moving indicator used intraday – starting with the first bar and ending with the last of the day. Anchored vwap, on the other hand, is tethered to a specific bar and displays the cumulative struggle of bulls and bears from that bar.

Developed by Brian Shannon, CMT, the anchored vwap (similar to traditional vwap) is more of a trend indicator. Shannon discovered the idea that certain days on a chart were more important than others. By anchoring vwap to a specific day, it could reveal the longer term support or resistance of bulls or bears who may have initiated positions either on that day or near the avwap later on.

These events could be anything from earnings to news releases, or simply high volume days on the chart. Similar to a pivot point or vwap boulevard in that it is often a firm psychological resistance level in the market, it differs in that it isn’t as static. Anchored vwap, while it sounds stationary, evolves as price and volume change. The fixture is simply the starting point of the calculation.

What Does Anchored VWAP tell us?

Much like volume at price, anchored vwap can tell us the price at which most traders are commonly positioned. Let’s use a visual example to explain this:

In this example, we anchored vwap to the largest prior volume day on the chart. Volume is significant, and whatever catalyst caused this move is inconsequential. The important thing is the volume traded on the day.

When we anchor vwap to this day, months down the road it becomes significant again. SPRT had a very high short interest — above 60%. This is significant, especially if any institutions were shorting the stock on the large volume day in March. As the months went by, we see that there are few opportunities for all of those shares to be covered.

In other words, liquidity dried up. That is, until July and August came around and demand for the stock began to push it higher.

As price reached the prior anchored volume weighted average price, we begin to see a lot of turmoil in the price at this level. Resistance first, then support, and support again – shown by the arrows.

The Significance of Anchored VWAP

The significance here is the underlying revelation of who is underwater and who is comfortable. Shorts had the upper hand for months, but once the price of the stock began to climb back to their “average” price, it became clear that shorts were in trouble. Millions of shares aren’t covered easily when a stock float is as small as 15 million, like SPRT.

This begins the game of averaging up to salvage the position. But with every effort to re-average, the pot of water gets hotter. And if the demand doesn’t let up, the end result can be catastrophic as margin calls pour in and brokers start cutting their losses by covering their client’s position. For more information on this, see our post on float rotation.

This can work in favor of shorts as well. If buyers and bag holders are averaged above the current avwap levels, it is likely the key average might provide resistance on any rallies into it. Will discuss this in an example below.

Three Anchored VWAP Strategies with Real Examples

Let’s take a look at three specific strategies you can use with the anchored VWAP indicator.

1. Red to Green Moves

This is a very simple strategy like the example we used above with SPRT. The strategy revolves around a move from being below the avwap to being above it. In other words, what was once resistance has become support, or longs who were red, are now green.

Let’s look at a recent example with AMD. Notice how AMD had a huge run up and then stalled. First, we anchored the vwap to the all-time high candle. Then, we allow time for the stock to pullback and consolidate. Here is what this looks like on a daily and hourly chart.

Notice that the avwap resisted the price for a number of days until the last two days. The astute trader could have kept this on radar, watching the consolidation, waiting to buy the “red to green” breakout at avwap.

The volume picked up on the break through this avwap level. Much like we saw with SPRT above, the importance of this level is on display as buyers step in and shorts realize they need to cover in case their average diminishes with any further price movement upward.

Other Signals to Consider

As with any strategy and indicator, the more favorable signals you can find, the better. In the example above, you also have a reverse head and shoulders pattern forming, along with a nice Volatility Contraction Pattern and a Pocket Pivot as well.

We won’t go into those in detail here, but rest assured you can find any number of other signals like moving averages or patterns to help confirm your avwap strategies.

2. Green to Red Moves

The great thing about vwap is that it typically becomes the precipice of a move in either direction. To that end, you can play avwap to the short side once a support is broken. Hence, the longs that were once green are now in the red.

AMC is a hot momentum stock catching a lot of popularity lately. It provided such an opportunity to go short as YOLOers and HODLers piled in as it ripped to new highs. Later it failed at the anchored vwap. Here is the chart:

As you study the chart, pay close attention to the story it is telling you. From where we anchored vwap at the highest volume and price candle bar, a lot of retail buying is occurring here as shares are being sold by those who’ve been holding from a much lower price.

Shares are being dumped, but are also being bought. The result is a tug of war in the ensuing weeks. As you can see, avwap tried to defend, but bears eventually won.

The avwap gives us the backdrop for the story between the bulls and the bears.

Intraday Trades

Over the course of the next few weeks, we see that this anchored VWAP level provided some support but was eventually overcome by too much supply at these high prices.

Interposing this important line on your intraday chart could have alerted you to a perfect shorting opportunity as AMC retested the underside of the avwap line on July 6 denoted by the blue downward pointing arrow.

Looks pretty clean, eh? We think so, too.

Now look at the one minute chart at this level. A bit uncanny how accurate it can be.

Like taking kid from a candy, the stock tried to rally into this red anchored VWAP level, but couldn’t survive the supply.

Later on in August, as the consolidation continued and matured, a rally brought the price of the stock back to this avwap level. Let’s look at it one more time to see what happened:

One of two strategies could have been employed here. If you were long for the rally, it provided a perfect profit target. If you’re short biased, it provided yet another opportunity for an intraday short.

3. Range Based Trades Using Anchored VWAP

Range trading can provide fantastic opportunities for short term trades. Often, trading ranges can be easily denoted by a quick glance at a chart identifying support and resistance. But with avwap, you’ve got an extra layer of confirmation to add to your trades.

In the example below, we’ve tethered vwap to the prior high made before the trading range began. This gives us a nice base for the range as it consolidates for the next move. Then with the formation of our first retest of those highs at the blue downward arrows, we can anticipate the upper bounds of the range by drawing a line.

Here’s what it looks like:

As you can see, this would’ve generated multiple trade signals as price bounced between the highs and lows of the range. Each level provided support or resistance for a number of weeks.

It is within these predictable patterns that short term swing trades and day trades can rack up significant profits before breakouts occur.

How to Practice With the AVWAP

Practice is the key to success in the markets. It isn’t worth putting your hard-earned money to risk in the markets until you’ve mastered a pattern.

One of the best ways to practice with avwap is to throw it on your charts and move the “anchor” around and see what happens. Where does it support? Where does it break? Can multiple avwaps on a chart give bigger clues to where long term money is located?

Like Brian Shannon, we recommend taking the indicator and tagging it to the significant areas of the chart like highs, lows, big volume days, events, etc.

When practicing in the simulator, you can find anchored VWAP in the studies tab. It will pop up a settings window that will allow you to enable other features like standard deviations, anchor selector, color, and more.

As with any indicator, the default settings are usually the most popular, but it never hurts to play with it to get a feel.

Conclusion

We hope you’ve found this helpful. Be sure to give these strategies a go in the simulator and let us know how successful you find them to be!

The post Three Explosive Anchored VWAP Strategies + Explanation Video appeared first on - Tradingsim.