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Trading With Market Statistics.II The Volume Weighted Average Price % Sign in to follow this Followers 36
Daily Analysis
(VWAP). By HFblogNews · Posted 6 minutes ago
By jperl, July 3, 2007 in Market Profile
Date : 12th March 2020. Morning Update
– March 12 2020 12th MarchFX News
Today – Wednesday washout is
&&&&& Start new topic ' Reply to this topic
becoming Thursday fallout. Equities
closed down 5% and now down 20%

1 2 3 NEXT ( Page 1 of 3 ) from February peak and in a BEAR...

Never Lose Again!! TheRumpledOne

jperl Posted July 3, 2007  By TheRumpledOne · Posted 15 hours
ago

In a previous thread, [thread=1962]Part I[/thread] I introduced the Volume Distribution Function in the form of a volume
Daily Analysis
histogram plotted along the price axis (see figure 1 of that thread). The length of the bars extending out to the right
By HFblogNews · Posted 22 hours ago
represent the amount of volume traded at that price during the day. The distribution has a peak which I call the peak
Date : 11th March 2020. Central Banks –
volume price or PVP ( also known as the Point of Control in Market Profile Analysis, but I won't use that term here in
Race to the Bottom – Again? 11th
order to avoid any confusion). . The volume distribution is a probability function, thus trading occurs less often in the MarchGBPUSD, H1The latest Central
low volume regions of the distribution compared to the high volume regions. However I also stated that the distribution Bank to act (in another surprise and
Members
function is dynamic and that the shape of the distribution changes during the day such that the PVP may change unscheduled announcement) is the Bank
* 10
of England. The BoE slashed rates by...
363 posts abruptly as the trading day progresses. As such, if price action is in the low volume region, it does not mean that there
will be a reversal back to the high volume region. The distribution function could simply expand itself and continue Understanding Forex Market
moving in the same direction with an eventual abrupt change in the PVP. This was shown by the price action in figures 2 F By fxeconomist · Posted yesterday at
and 3 of the previous thread. 04:15 AM

I wonder why didn't they include such

popular and reliable brokers as Hotforex,
IB or Tickmill. They all have FCA license.
In order to shed more light on this, I want to introduce the concept of the volume weighted average price or VWAP. The
VWAP is a well known quantity used by institutional traders to gauge there trading performance. It's use as a day Become a Better Trader
trading tool however has not been fully explored. The VWAP is simply the average of the Volume Distribution Function. F By fxeconomist · Posted yesterday at
04:14 AM
The figures below show examples. The red line is the PVP of the distribution and the light blue line is the VWAP for the
distribution. To compute it, take the volume Vi for each bar i in the distribution, multiply it by the bars price, Pi, compute Yes, you are right you should improve
your market analysis skills and you
the sum, SUM(PiVi) and divide by the total volume, Vtotal, for the whole distribution:
should also learn how to trade using
demo account for example from
Hotforex. This should help you to enter
into the real world of Forex
VWAP = [sUM (PiVi)]/Vtotal

The VWAP has the following characteristics:

1) Being the average for the entire distribution, Volume traded above the VWAP is identical to volume traded below the
VWAP.

In terms of the distribution function as a probability function, it means that when price action is at the VWAP, there is
equal probability for price to move up as there is for price to move down.

As corollaries then we have:

2) if the VWAP is above the PVP, then more volume has traded above the PVP than below it. The distribution function is
thus skewed to the upside and the expectation is that at the PVP, price action should move up.

Take a look at the figure below, the ER2 for June 28,2007.

attachment.php?attachmentid=1961&d=1183424208

At the end of the day, the VWAP (light blue line) is at 847.98 and the PVP at 846.60. The VWAP > PVP hence more
volume was traded above the PVP than below.

3) Conversely, if the VWAP is below the PVP, then more volume has traded below the PVP than above it; the distribution
function is skewed to the downside and the expectation is that when price is at the PVP, price action should move
down. You see this in the following figure for ES on June 11, 2007.

attachment.php?attachmentid=1962&stc=1&d=1183425282

The VWAP is at 1525.32 and the PVP is at 1528.75. VWAP < PVP. Clearly the amount of the skew will be a function of
the difference between the VWAP and the PVP.

4) If the VWAP approximately equals the PVP, then the distribution function is symmetric. In this case when price
touches the PVP, there is no expectation of price movement in either direction. Instead, expect to see small oscillations
about the VWAP. The next image shows this for ER2 on June 22, 2007.

attachment.php?attachmentid=1963&stc=1&d=1183425479

VWAP = 840.44 and PVP = 840.20. Oscillations about the VWAP occured for most of the afternoon starting at 13:30.

5)The VWAP and its relation to price also determines the trend of the market as follows:

a)If Price >> VWAP, the trend is up

b)If Price << VWAP, the trend is down.

6) Finally it doesn't matter on what time scale you plot the distribution functions and its associated VWAP. The chart
could be a 1, 2 ,3 minute etc time chart, or a tick chart, or a range bar chart or a volume bar chart. The distibution and
hence the PVP and VWAP are all the same. You need only take a quick glance at the VWAP and its relation to price, to
decide the trend of the market.

In future threads I will present some examples of how to use this information for entering a trade. In [thread=2008]part
III[/thread] we will start with the newbies, since they need the most help. After that we will look at more complex
situations using only the distribution function and the VWAP.

There is a lot here to digest, so I will stop for now

Comments are welcome.

JERRY

+ Quote

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waveslider Posted July 3, 2007 

Hi Jerry, as an example of what you are doing, why not do a day by day analysis based on your methods. That way we

W
can also learn the weaknesses and nuances required to understand your approach. Thanks in advance!

ws

Market Wizard

* 10
544 posts

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jperl Posted July 3, 2007 

+ waveslider said:

Hi Jerry, as an example of what you are doing, why not do a day by day analysis based on your methods. That way
we can also learn the weaknesses and nuances required to understand your approach. Thanks in advance!

ws
Members
* 10
363 posts

That's coming next waveslider. I will start with some simple video examples on how to use the distribution function for
trading.

JERRY

+ Quote

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torero Posted July 3, 2007 

A quick question: the VWAP constantly moves throughout the current trading day. I see you have the horizontal line, is
this line the close of previous day?

Market Wizard

* 10
1330 posts

+ Quote

jperl Posted July 4, 2007 

+ torero said:

A quick question: the VWAP constantly moves throughout the current trading day. I see you have the horizontal
line, is this line the close of previous day?

Members
* 10 Torero- the line shown is the VWAP value for the end of the day (blue line). Similarly for the Peak Volume Price (red line).
363 posts
I purposely drew these as horizontal lines so that you could see the relationship between the two. When we start
looking at the dynamics of the lines in the upcoming videos, you will see how the lines change with time.

JERRY.

+ Quote

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Nick1984 Posted July 5, 2007 

I'll ask this now but I guess I might have to wait for the videos to understand this. The way I see it is that you need to
really wait for most of the day to finish before you get a clear development of your volume histogram so the VWAP and
PVP would be used retrospectively i.e: the VWAP and PVP made today would give me an indication of what to expect
tomorrow?

Members
* 10 In essence this seems to be similar to MP but using volume histograms instead of TPO's. Correct me if I'm wrong
446 posts
though. It's a very interesting thing you've got going on here.

+ Quote

BlowFish Posted July 5, 2007 

Good stuff Jerry. I have a few questions and observations but I'm going to try and hold my tongue until until you are a bit

B
further along. Its tough but I'm gonna try :-)

Market Wizard

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3308 posts

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TinGull Posted July 5, 2007 

Again, very much looking forward to this discussion. Looking back, this is some pretty powerful stuff. Nice area to be
aware of for sure. And Nick, I believe you're right. I've been looking at the prior days VWAP and PVP and that seems to
work very nicely.

Market Wizard

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1444 posts

+ Quote

Future Posted July 5, 2007 

Here is my 2cents with the VWAP. I keep a real-time record of the VWAP similar to how a POC moves higher or lower. As

F
the VWAP is lifting I focus on the long side. If I am long and the VWAP starts to drop (even by tenths of a point) I take
this as a warning signal. Vice versa for shorts. So picture the VWAP number moving up and down just like the tape. Also
keep in mind that the VWAP is a common number viewed by many insitutional traders as well as the general public
investors.

Members
* 10
10 posts

+ Quote

jperl Posted July 5, 2007 

+ Nick1984 said:

The way I see it is that you need to really wait for most of the day to finish before you get a clear development of
your volume histogram so the VWAP and PVP would be used retrospectively i.e: the VWAP and PVP made today
would give me an indication of what to expect tomorrow?

Members Good observation Nick. Todays VWAP and PVP can be used for tomorrow's trade setups. We will cover that topic down
* 10
the road when we get to more advanced types of trades. However, you will see in the videos that you can use todays
363 posts
developing VWAP to make trades today. This will be the basic VWAP trade that must be understood before we move on.
Newbies will be able to get their feet wet here. A sort of crawling before we start walking.

+ Quote

In essence this seems to be similar to MP but using volume histograms instead of TPO's. Correct me if I'm wrong
though. It's a very interesting thing you've got going on here.
Market Profile Analysis is actually a subset of this more general way of looking at market statistics. There are important
differences, however. a)Market Profile uses half hour increments for setting up the distribtuion. Generalized market
statistics has no special time scale. b)I introduce the concept of the distribution average (the VWAP) which Market
Profile does not use. c)There is no concept of value area as used in Market Profile. Value area is a purely heuristic
invention. Rather we use the terms, high volume zone or high probability zone and low volume or low probability zone. In
addition we will see later on that there is a generalized standard deviation of the VWAP which can be used as a measure
of market volatility. But I am getting ahead of myself....so stay tuned.

+ Quote

jperl Posted July 5, 2007 

+ Future said:

Here is my 2cents with the VWAP. I keep a real-time record of the VWAP similar to how a POC moves higher or
lower. As the VWAP is lifting I focus on the long side. If I am long and the VWAP starts to drop (even by tenths of a
point) I take this as a warning signal. Vice versa for shorts. So picture the VWAP number moving up and down just
like the tape. Also keep in mind that the VWAP is a common number viewed by many insitutional traders as well as
Members
* 10 the general public investors.
363 posts

That's good Future.....glad to see you are using VWAP in your trading. Keep in mind that the dynamics of the VWAP is
very different from the PVP (What you call the POC). The VWAP changes gradually over time, whereas the PVP changes
abruptly. If you follow both the VWAP and PVP at the same time, you will see this dyanmic. I will show some videos of
this so you can get the feel for how the market reacts to changes in the relative relation between the two.

JERRY

+ Quote

Dogpile Posted July 6, 2007 

<<The VWAP changes gradually over time, whereas the PVP changes abruptly.>>

D the POC does not change abruptly. I only say that because you previously stated that PVP and POC are the same
concept.
Market Wizard

* 10
584 posts The purpose of a POC is to show that price has been 'accepted' by buyers and sellers as fair. This only occurs over
time. There is no POC until price has been accepted over time -- its just price discovery until then. (if we go a day where
price isn't accepted at any price, then it is considered a trend day). we had a thread a month ago or so that discussed
how long price had to settle before we considered it an 'accepted price.'

I agree that understanding 'value' versus 'current price' is an important trading concept -- and monitoring how price is
acting as it attempts to break away from an established 'balance' is another important concept.

+ Quote

jperl Posted July 6, 2007 

+ Dogpile said:

the POC does not change abruptly. I only say that because you previously stated that PVP and POC are the same
concept.

Members
* 10
363 posts

Ok Dogpile, I will accept your distinction. This is why I will use the term PVP rather than POC in describing the peak in
the volume distribution function. This peak does change abruptly with time.

JERRY

+ Quote

BlowFish Posted July 6, 2007 

The PoC does change abruptly as it is the modal point. So for example if there is a base with a PoC at 432 and price

B
moves up to 478 and builds a new base as more volume is done (or more TPO's pass) at this point the PoC will jump as
it becomes higher than the old point.

Market Wizard Cheers.

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3308 posts

+ Quote

Dogpile Posted July 6, 2007 

The POC changes every day. Maybe some would consider that abrupt. Sometimes the market builds what appears to be

D
a POC but later it then builds the real POC at a higher or lower level later. Personally, in the timeframes that I watch the
market, I do not consider that abrupt.

Market Wizard This is a core concept -- if you don't understand this -- you do not understand market profile. 'Price' moves in
volatile/abrupt fashion, 'value' takes time to build. POC, by definition, does not move as abruptly as price. If you want to
* 10
call POC movement 'abrupt' --- then what would you call 'price' movement -- 'super-duper abrupt'....?
584 posts

+ Quote

jperl Posted July 6, 2007 

+ Dogpile said:

The POC changes every day. Maybe some would consider that abrupt. Sometimes the market builds what appears
to be a POC but later it then builds the real POC at a higher or lower level later. Personally, in the timeframes that I
watch the market, I do not consider that abrupt.

Members
* 10
363 posts This is a core concept -- if you don't understand this -- you do not understand market profile. 'Price' moves in
volatile/abrupt fashion, 'value' takes time to build. POC, by definition, does not move as abruptly as price. If you
want to call POC movement 'abrupt' --- then what would you call 'price' movement -- 'super-duper abrupt'....?

Dogpile---I suggest you wait to see the videos that I will be posting in the coming weeks. You will then understand what
I mean by the discontinuous change that occurs in the PVP compared to the VWAP.

JERRY

+ Quote

nelo Posted July 14, 2007 

Great thread, Jerry, thanks. The first message in it put a lot of light into VWAP usage for me. I watch it for daytrading

N
and until now I just took it as a market sentiment indicator - price above VWAP = bullish and vice versa.

But the trick is to figure out (to a certain degree of probability) that the market went too far from VWAP and is about to
Members return.
* 10
20 posts

Also I found that the market very often bumps off the VWAP (refuses it), it is a good price level as well.

Jerry, we are definitely very interested in the video or further ideas, examples how you use VWAP for trading.

+ Quote

jperl Posted July 14, 2007 

+ nelo said:

Great thread, Jerry, thanks. The first message in it put a lot of light into VWAP usage for me. I watch it for
daytrading and until now I just took it as a market sentiment indicator - price above VWAP = bullish and vice versa.

Members
* 10 But the trick is to figure out (to a certain degree of probability) that the market went too far from VWAP and is
363 posts about to return.

Also I found that the market very often bumps off the VWAP (refuses it), it is a good price level as well.

Jerry, we are definitely very interested in the video or further ideas, examples how you use VWAP for trading.

Ok Nelo, glad you are finding this useful. there is more to come, so stay tuned

+ Quote

BlowFish Posted July 15, 2007 

+ Dogpile said:

B The POC changes every day. Maybe some would consider that abrupt. Sometimes the market builds what appears
to be a POC but later it then builds the real POC at a higher or lower level later. Personally, in the timeframes that I
watch the market, I do not consider that abrupt.

Market Wizard

* 10 This is a core concept -- if you don't understand this -- you do not understand market profile. 'Price' moves in
3308 posts
volatile/abrupt fashion, 'value' takes time to build. POC, by definition, does not move as abruptly as price. If you
want to call POC movement 'abrupt' --- then what would you call 'price' movement -- 'super-duper abrupt'....?

Hi Dog,

I'm struggling to understand what you mean here what you say seems to support the abrupt PoC point of view.

As you say the PoC requires time to build (as it is defined as the 'most common' or modal point) When a new area of
value has been build (by price staying there for long enough for more TPO's to build than at the old PoC) the PoC then
moves abruptly (i.e. jumps) from the old PoC price to the new PoC price.

In most instruments price moves up and down tick by tick this is relatively 'smooth'. It is seldom (never for all intents and
purposes) that price jumps from the old place of value to the new one. Of course as price moves from one area of value
to another it tends to do that fast and volatile but it does at least move through the intermediate price levels. The PoC
does not. Once new value has been built it jumps (moves abruptly) to the new level.

Actually Jerry's point was to do with VWAP rather than price. The same argument holds. As more and more volume is
done in the new area of value the average is slowly drawn to that level. It is the difference between a modal function and
average function. The latter can never be as abrupt.
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