Perfect Example of the VWAP Hold

The market is closed for Labor Day today, so I’m doing something a little different.

I want to go over a pattern that is core to what we do and hunt for every single day.

And when you catch a perfect one…

It’s a beauty.

Going back almost 15 years, this is my favorite afternoon pattern.

Now, the downside is that afternoons are not as explosive.

But the reality is, afternoons are smoother and less volatile.

I found that helpful when I was still trading part-time.

When I got started I was a little too impulsive. Part of the reason is because I was running a business and didn’t have time to trade.

What would happen is, I would finally get a slow morning and I would just pile into stuff.

I did okay, but overall it didn’t end well because I was forcing trades that weren’t there. I was trying to fit them into my schedule.

That’s always a bad idea.

Now, if you work a white-collar job you know there’s the morning rush. Then, as you get into the afternoon, the temperature lowers a little bit.

It was like that for me, so I decided to just trade afternoons.

And that is how I came to love…

The VWAP Hold Pattern

For several years I traded this pattern almost exclusively.

It’s a pattern every trader should be familiar with, but many aren’t.

Last week we saw a perfect example…

Look for This Pattern Every Afternoon

On September 1, Sono Group N.V. (NASDAQ: SSM) held VWAP all day…

As you can see, it was nonstop sideways action.

I have an algorithm, the Flux Algo, that looks for stocks with that exact kind of price action, where it’s stuck within a range of VWAP.

Now, when a stock trades like that it often forms a channel, or band.

For example, take a look at the next chart:

Do you see how SSM found support just below VWAP?

There was also resistance just above, at around $4.10.

SSM came up on Flux with a signal at $4.23:

So, the Flux point is just a clean breakout above that VWAP band.

On the chart below, I’ve added the Flux signal line. You can see it was also an important resistance level in premarket and again right after the open.

So, what we have now is clear levels.

Use the Levels To Create a Trade Plan

The VWAP, support, and resistance levels make it easy to create a trade plan.

Remember, a full trade plan includes your entry, risk, and target.

First, you’ve got your entry and risk:

Entry: $4.23

Risk: $4.10

Now, that’s a pretty tight risk zone. Depending on your risk tolerance, you could open it up to VWAP.

I always suggest tighter risk if you’re inexperienced. It has to do with your number…

What’s Your Number?

That’s your max acceptable loss, okay?

So, with SSM if you risked 13 cents per share, then you’d determine your position size by dividing your number by the risk.

For example, if your max acceptable loss is $100, and your risk is 13 cents per share, then your max position size is roughly 770 shares. (100/.13 = 769)

Keep in mind that you also have to adjust your position size based on how much of your account you’re willing to put into any single trade.

The only thing missing is the target.

All I did was use the Oracle major resistance (M/R) level, which was $4.84, as the target.

Here’s what it looks like:

My friend, that is a perfect example of the VWAP hold pattern in action.

Everything you needed for a trade plan was there. There was time to make a plan and execute it.

And you didn’t even have to hold all the way to the M/R for it to be a good trade.

Assuming your risk was $4.10 and you got in right at $4.23, there was a potential 5:1 reward-to-risk.

You could’ve sold or scaled out anywhere along the way and it would still be a win, okay?

The Bottom Line

SSM had everything going for it that afternoon:

• Midday support
• VWAP hold
• A clean buy signal (whether you use Flux or not)
• Clear major resistance as a target.

As you study the chart above, focus on how tight the band was between the signal and risk. That’s exactly what we want..

Because if SSM hadn’t worked, that was your stop loss.

Remember, you have to do the math. You have to know your number.

But in this case, you could risk 13 cents per share to make 60 cents per share.

My friend, that’s how we trade.

Enjoy the rest of your long weekend and I’ll be back with my regularly scheduled newsletter tomorrow.

Have a great day.

– Tim Bohen