VWAP TRADING:

HOW TO TRADE
GAPS??
(BY MAKING USE
OF PREVIOUS 4
DAY VWAPS)
Hi everyone, in this little write up, I intend to lay bare how to trade Gaps using
VWAPs. This is NOT my original work. @sanstocktrader has already presented
a version of this write up in Trader’s carnival. Still I feel that this use of VWAP
has not reached many who are trading using VWAP. This is only my
understanding of the concept and the readers are free to improvise if they wish
to.

Tools Used: Past 4 days VWAP plotted on your platform.

Logic used: Out of the last 4 days VWAPs plotted ,if the price opens and
sustains below the lowest VWAP then the price action is considered to be
bearish. In such case instead of jumping directly into the trade one can wait for
a retracement to the lowest placed VWAP of the last 4 days.

How to know if there can be a retracement??

If prices open near supports and if they are moving in a range, one can wait for
either a breakout or wait for a retracement. Whichever comes first, just join than
gang. If prices open below all VWAPs, wait for a retracement to the lowest
placed VWAP. Price action there can give clues about where to place the trade.

Lets look at some examples:

Example 1 : BNF (6-5-2019)

In the above example, BNF(6-5-2019) price gapped down below all past 4 days
VWAPs. The order of the VWAPs does not matter. What matters is the fact that
the price action is bearish. In this case the lowest place VWAP was that of 3 rd
day. So this becomes the action area for us. Once this is identified, focus shifts
to price action at 3rd day VWAP.
I have marked 3 candles, namely a,b,c. Watch and study those candles. Candle
‘a’ just kissed the 3rd day lowest placed VWAP. Candle ‘b’ and candle ‘c’
formed wicks which is basically the exact candle which one can wait for to
initiate the trade. I call them rejection candles. The trade has to be place 1 tick
below the rejection candles. Target and SL and be the same which one follows
in the regular strategy. I usually play safe here and target 1:1 as R:R. Readers
can work this out as per their comfort. In trading one size DOES NOT fit all.

Example 2: Tatastel (6-5-2019)

In this example also price gapped below the lowest 4 day VWAP. One can wait
for a retracement to the lowest VWAP and wait for price action at the Hit Zone
and take the trade. In this case one can short below a close below 4 Day VWAP.
Target and SL is usual as followed in the usual strategy.

Example 3: Hindalco: 6-5-2019

In the above example after price gapped below previous 4 day VWAP, there
was a retracement towards it. Candle ‘a’ and candle ‘b’ can be the trigger
candle. Below the trigger candle, one can short. SL and target will be as per the
usual strategy.

In some cases, price action is not that bearish. Price will not gap down below 4
day VWAP. Even in such case, previous days VWAPs can help to fine tune
trades.

Example: Reliance Ind.(6-5-2019)

Price gapped down below Yday VWAP but did not open below last 4 day vwap.
One can observe the candle marked ‘a’. Watch how it resisted at 2 day VWAP
and in the further candles, confirmed the sell. Also the move targeted 3 day and
4 day VWAP.

Another Example: BEML (Bearish Case) (6-5-2019)

In the above example also price gapped down below Yday VWAP which was
also the lowest VWAP for the past 4 days. Price retraced and tested the lowest
VWAP. The test happened at the candle marked ‘a’. In future candles price
closed below running VWAP too, confirming the short trade. The SL and target
remain the same as per the usual strategy.

Summary:

If the price gaps down below the lowest VWAP of the past 4 days, wait for a
retracement, observe price action as explained in the examples and then take the
trade.

In case of gap down which is not as severe as above, the mid VWAPs can be
used to take trades.

I have mostly considered only Gap down examples. Will add Gap up examples
in future edits.

I hope I could convey what I wanted to. In case of further queries, one can DM
me on twitter: @blisstrades

Also can message me on Telegram: @varun550