The Indicator Banks ACTUALLY Use - Full Guide to VWAP — Transcript

Full transcript

1. 0:00what if I told you banks are jealous of
2. 0:02you I'm not joking when you trade you
3. 0:03send an order to your broker you get
4. 0:05executed at the price you want you place
5. 0:06your stop- loss your take profit and
6. 0:09you're done but Banks hedge funds and
7. 0:10other big Financial Market participants
8. 0:12you know they don't have a couple
9. 0:13thousand dollars in their account even
10. 0:15hundreds of thousands of dollar in their
11. 0:16account they have to trade billions
12. 0:19every single day and if they were to
13. 0:20Simply buy the market they would move
14. 0:22prices so much and gradually fill their
15. 0:25orders at worse and worse prices so the
16. 0:27Necessities that these Market
17. 0:28participant have is to fragment their
18. 0:30order into many small orders and
19. 0:32gradually and granularly put them into
20. 0:34the market to together better fill if
21. 0:36you take a heat map like the one I use
22. 0:38and zoom in you will often see perfectly
23. 0:40cadenced small orders that are bought
24. 0:42and sold in the market and while it's
25. 0:44okay for you as a day trader with five
26. 0:45es contracts to not care about this side
27. 0:48of institutional trading called
28. 0:49execution Alpha where Banks try to
29. 0:51optimize their Edge even in the filling
30. 0:53of the orders you still might want to
31. 0:54know about it because it affects how the
32. 0:56auction of these orders pushes price in
33. 0:59every Market up and down during the day
34. 1:01and during the week this table shows
35. 1:03some types of order execution that you
36. 1:04as an institution can Implement price
37. 1:06driven algorithms and volume driven
38. 1:08algorithms the first one and the most
39. 1:09common one is vwap vwap stands for
40. 1:12volume weighted average price it's
41. 1:14basically a moving average that doesn't
42. 1:15consider only price in its formula but
43. 1:17also includes trading volume in this
44. 1:19video we will see how vwap actually
45. 1:20works why is it used by smart money and
46. 1:23how you can integrated in your trading
47. 1:24strategy to potentially boost your Edge
48. 1:27and your profits and have an
49. 1:28Institutional dynamic reference as an
50. 1:31extra confirmation for your day trades
51. 1:33so if you're not a complete Financial
52. 1:34illiterate you might have heard of the
53. 1:37gaussian Bell also known as normal
54. 1:39distribution which in statistics
55. 1:41represents the normal distribution of
56. 1:43elements in a sample so let's say we're
57. 1:45measuring the average height of people
58. 1:47in the UK we will have a very small
59. 1:49percentage of very short people a very
60. 1:52small percentage of very tall people but
61. 1:54most people are going to be in the
62. 1:56average part of the distributions if we
63. 1:58want to measure the average smartness of
64. 2:00people in the UK we will see that there
65. 2:02is very few people with a low IQ very
66. 2:04few people with a very high IQ and most
67. 2:07of the people are going to be in the
68. 2:08average this Central value is the
69. 2:10average and then the area where most of
70. 2:13the sample are going to be is called a
71. 2:15standard deviation also known as the 68
72. 2:17percentile and if you take a look at
73. 2:19normal volume profile as an example you
74. 2:21will see that it's basically a bell
75. 2:23curve what is highlighted also known as
76. 2:25the value area or the fair value area is
77. 2:29none other than a standard deviation
78. 2:31Trader at some point decided to put this
79. 2:33at 70% to make things easier so in
80. 2:36volume analysis the standard deviation
81. 2:38is where most of the volume are traded
82. 2:40and this would be the average now more
83. 2:42or less the same thing happens with the
84. 2:44vwap the vwap first of all is an average
85. 2:47so we could consider it as this middle
86. 2:49line over here but it's not a static
87. 2:51level it's a dynamic level it's a
88. 2:53calculation constantly being updated
89. 2:55which tells us the current volume
90. 2:58weighted average of price so this gives
91. 3:00us a very objective view of what is
92. 3:04discounted and what is a premium price
93. 3:07so everything that sits below the vwap
94. 3:10is Discount related to the volume
95. 3:12weighted average price of the session so
96. 3:13an objective view of what was the actual
97. 3:17fair value in the market what is the
98. 3:19fair volume weighted price on average
99. 3:22throughout the whole session whatever
100. 3:23will be up here is going to be premium
101. 3:25you know the concept of premium and
102. 3:26discounts discussed by ICT is comparing
103. 3:29to a swing high or a swing low whatever
104. 3:32sits below 50% or above 50% this would
105. 3:35be premium this would be discount but
106. 3:37still it remains an arbitrary decision
107. 3:40where to track this and it's going to be
108. 3:42measured in an Impulse this is a very
109. 3:44simplistic view of discount and premiums
110. 3:47that's the reason why so many impulses
111. 3:49don't retrace until 50% but it's the
112. 3:51market that decides what is premium and
113. 3:54one is discounts that's why sometime
114. 3:55price keeps buying even when we're at
115. 3:57the highs or even if we retrace just a a
116. 3:59little bit and we don't go below 50%
117. 4:02before buying again so it is objective
118. 4:03but it's completely arbitrary to choose
119. 4:05which impulse we have a much more clear
120. 4:07and objective indication of Premium
121. 4:10discount and fair value inside of a
122. 4:12session that's why it's being used by
123. 4:14institution and smart money and Banks as
124. 4:16a method of filling orders and as you
125. 4:19can see from this image volume driven
126. 4:21algorithms like vwap which are used to
127. 4:23control the execution rate of big orders
128. 4:26which are being fragmented throughout
129. 4:27the session are better suited for long
130. 4:29duration orders like from 30 minutes to
131. 4:311 day so big orders are mainly executed
132. 4:34through the vwap so as you can see the
133. 4:36market volume changes throughout the
134. 4:37session you have a big spike at Market
135. 4:39open then less volume throughout the
136. 4:41session then as much as we get closer to
137. 4:43the close of the session it's getting
138. 4:44higher and higher on average so the same
139. 4:46thing will be done by the vwap so in a
140. 4:48trading floor as an example if the
141. 4:50analyst Department of a bank decided
142. 4:51that we have to go long today the head
143. 4:53of trading will go into the trading
144. 4:54floor and say hey we have to execute
145. 4:55blah blah blah orders at the best
146. 4:57possible price a lot of times the
147. 4:59reference for these trades as a
148. 5:00discounted pricing or a discounted value
149. 5:03will be whatever is below the daily vwap
150. 5:07or the weekly vwap same if the position
151. 5:09is short they will try to load most of
152. 5:11the volume in the premium area but of
153. 5:14course the best of the best to fill this
154. 5:15orders is going to be exactly at the
155. 5:18extreme of these lines which are going
156. 5:20to be our standard deviations this is
157. 5:22going to be our discount standard
158. 5:24deviation this is going to be our first
159. 5:26premium standard deviation so these
160. 5:28prices and these prices are going to be
161. 5:31optimal prices to get all those little
162. 5:33fragmented order being executed then you
163. 5:35can have even wider ranges which are
164. 5:37going to be the second standard
165. 5:39deviation so two standard deviations and
166. 5:41a negative second standard deviation and
167. 5:43so on and so forth and the more prices
168. 5:46go outside and reaches for example the
169. 5:48higher bends the higher the chance there
170. 5:50will be some level of reversal same
171. 5:53thing with the lower ones because
172. 5:55they're further away we will be from the
173. 5:58dynamic fair value of the market and the
174. 6:00most likely we will be rebalancing of
175. 6:02course this is not a law this is just a
176. 6:04dynamic reference which is a much deeper
177. 6:06reason to have an edge rather than
178. 6:08normal Ballinger bands or moving
179. 6:10averages let's see some examples so
180. 6:11these are my orderflow charts in my
181. 6:14platform I'm going to add volume by
182. 6:15Price values go to vwap developing vwap
183. 6:18now let's zoom out and as you can see
184. 6:21this line is being reset as soon as
185. 6:23every single session starts again so
186. 6:26with every new session this is being
187. 6:27reset because it's a reference for the
188. 6:29session and as you can see when we go
189. 6:31further and further away from this
190. 6:33average we tend to trade back at it when
191. 6:35we Break It We tend to maybe retest it a
192. 6:37couple times before going down sometimes
193. 6:39we just completely trade through it but
194. 6:41still is the dynamic value where most
195. 6:44volume was traded during the session so
196. 6:46often it will give a reaction and act as
197. 6:49support or resistance so as you can see
198. 6:51price very often use this as a way of
199. 6:55support or resistance as it is a dynamic
200. 6:58institutional reference after all this
201. 7:00big sell off we open a new session and
202. 7:03once the fair value is established and
203. 7:05the New York session open look at the
204. 7:06time right here we test the vwap a
205. 7:08couple times before pushing back up then
206. 7:10once we're getting closer to the end of
207. 7:12the session we bounce back right on the
208. 7:14vwap again here once it's been
209. 7:16established we bounced right back off of
210. 7:18it a lot of times even here after the
211. 7:21London session in the New York session
212. 7:23we start feeling this vwap more and more
213. 7:26as a form of resistance so of course you
214. 7:28might want to back test test it a lot
215. 7:30and see for yourself the actual edge of
216. 7:32the average but the cool thing starts
217. 7:34happening when we enable the bands the
218. 7:36first standard deviation is one the
219. 7:38second here is 1.5 standard deviation
220. 7:40usually I just keep it at two which is
221. 7:42the third and even the third standard
222. 7:44deviation and as you can see as I apply
223. 7:47that it's giving me very very precise
224. 7:50levels where price is bouncing from and
225. 7:53the more we trade in the outer bands the
226. 7:56higher is the probability that at least
227. 7:58we are going going to see a bounce back
228. 8:01to the fair value because Market have
229. 8:03been built to make trading easier for
230. 8:05big operators that's why the markets
231. 8:07work as an auction and that's why they
232. 8:09look for liquidity and they look for
233. 8:10balance and as you can see once we break
234. 8:12off and rebre these levels we have a
235. 8:16little bit of resistance in the first
236. 8:17standard deviation some more resistant
237. 8:19in the second standard deviation testing
238. 8:21the first one going back but also there
239. 8:23is moments with high momentum and once
240. 8:26we've established a strong Trend where
241. 8:28still markets will keep buying even at
242. 8:31higher and premium prices so vwap is not
243. 8:33always working it's always needed to
244. 8:36have a context behind your trading idea
245. 8:38you're not just going to trade based off
246. 8:40of vwap only so say you might have a
247. 8:42long idea for your session and as the
248. 8:44New York session opens we are still
249. 8:46right on Fair Value we start running up
250. 8:49you might want to wait until the price
251. 8:51has gone at least to the first if not
252. 8:53the second standard deviation we've
253. 8:55accumulated a bunch of orders below here
254. 8:57and created volume below and see the
255. 8:59vwap going down a little bit also and
256. 9:02after we broke it and tested it we can
257. 9:04try our long trade this can be one of
258. 9:06the ways to use it and you can use the
259. 9:07second and third standard deviation as a
260. 9:09Target or if you're using reversal
261. 9:11strategies you might want to use these
262. 9:13as some sort of overbought or oversold
263. 9:16levels not just based on previous price
264. 9:18but based on the volume of the whole
265. 9:20session and use the central vwap as a
266. 9:22target for Price rebalancing this
267. 9:25overbought situation as you can see
268. 9:27something similar happened here we
269. 9:28opened the session we shorted the
270. 9:30out of the market we went down into the
271. 9:32lower standard deviations and here is
272. 9:34where you want to look for a trade this
273. 9:36is the most convenient price in the
274. 9:38whole session or the most convenient
275. 9:40value and price compared to the rest of
276. 9:42the session and as we see in this
277. 9:44current session we have been respecting
278. 9:46these levels pretty greatly actually we
279. 9:48had a spike here back to the vwap first
280. 9:50band second band test we don't close
281. 9:53really above the vwb but we test the
282. 9:55first standard deviation we run through
283. 9:57all of them at the last standard
284. 9:58deviation we run back up to the first
285. 10:00one pull back on the second one back to
286. 10:02the average before breaking it we test
287. 10:04the first one go to the first one test
288. 10:06the average again on the second one
289. 10:08pierce through it test again test and
290. 10:10again test over here so as you can see
291. 10:12these level are really felt by the
292. 10:14market again not because it's a magical
293. 10:16indicator but because it is an
294. 10:18Institutional reference and institution
295. 10:20are the ones moving the market try to
296. 10:21back test a little bit with it in your
297. 10:22trading strategy and see if it can be an
298. 10:24edge booster if it is leave a comment
299. 10:26and let me know if it helped if you like
300. 10:28this video leave a like and a follow and
301. 10:29I'll see you in the next one ciao