Page 350 - THE MARKET WHISPERER

346 PART 10 - Winning Trades

Using VWAP at Opening of
Trade

In Chapter Six, we learned that institutional traders use the VWAP indicator
during intraday trading. Now we will learn how to use this index for short-
term trading, right out of the trading gate.

Often, and usually as a result of some news item, we expect strong
volatility in a stock during its first seconds of trading. One technique
customarily used when we wish to take advantage of strong volatility
in a stock is the Pre-Market VWAP test, applied several seconds before
trading opens. As we know, orders can be executed prior to the official
opening of the stock exchange. Based on pre-market trading activities,
the VWAP can be measured prior to the opening of trade, for example: a
stock opens with a large downward gap before trading begins. As a result,
an institutional process occurs when trade opens, known as “finding the
price.” Institutional traders, with their huge quantities, check the levels
of support and resistance during the minutes prior to the start of trading,
looking for the “fairest” opening price at which they will begin shifting large
quantities of shares. If the stock opens with a downward gap and in its first
seconds of trading is below the pre-market VWAP, we know that sellers
are dominant when the market opens. The probability is therefore great
that the price during the first seconds of trading will fall. If the opposite
situation exists, where the stock opens with a downward gap, but during
the first seconds of trading is above the pre-market VWAP, we can assume
institutional buyers are busy, allowing us to take advantage of the situation
and buy immediately when trading opens. The pre-market VWAP allows
us to enter orders earlier than other traders who are trying, a little later in
the day, to estimate the initial market direction through changes of price
and the momentum several minutes after trading opens. By nature, the act
of waiting and the altered prices at opening create greater risks for those
who wait. Using the VWAP will reduce the level of risk for professional
traders, giving them certain advantages.

One of the toughest problems of trading based on pre-market VWAP is