If you’ve ever wondered how successful traders spot explosive breakouts or identify potential reversals with uncanny accuracy — keep reading and you’ll discover the secret sauce behind their trading prowess…
You see, there are two crucial factors that can make or break your trades.
And successful traders know how to use the indicator that brings them both together.
So if you’ve ever found yourself drowning in a sea of stock options, unable to make sense of which ones are worthy of your attention…
Read on for my tips and tricks on how to use this indicator to pinpoint the best trading opportunities so you can navigate the fast-paced world of day trading with confidence.
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The Ultimate Indicator
VWAP stands for Volume Weighted Average Price and is one of the most essential indicators for day traders like us.
It combines two crucial data points — price and volume. That makes it a powerful tool for analyzing stocks.
By using VWAP, we can assess the bullishness or bearishness of a stock’s price.
And since it’s widely used by traders, movements around VWAP can create self-fulfilling prophecies which can make it an even more reliable indicator.
How To Use VWAP to Spot Breakouts
When looking for VWAP breakouts, it’s essential to have specific criteria in mind.
I like to focus on stocks that are…
- Trading between $1 and $20.
- Up more than 10% on the day.
- Trading volume greater than a million shares.
- Within 2% of VWAP, as these are primed for a potential breakout.
Put the criteria into your StocksToTrade scanner to filter stocks and get a list that matches the criteria quickly.
Now, when you have a list of stocks from your screener, you can analyze the charts…
Look for strong price action. On the intraday chart, you want to look for the stock to be close to breaking through VWAP, or already above it and holding it.
Look for stocks having a breakout to new 52-week highs on the daily chart.
Avoid weak price action and stocks with failed attempts to break key levels.
By keeping your watchlist manageable, you increase your chances of spotting high-potential trades.
How To Plan A Trade
Once you have narrowed down your list, and you identify a stock with a strong chart that’s near VWAP, it’s time to plan your entry and risk management.
Enter the trade if the stock breaks above a significant level like the high of the day.
PSQH chart: 1-day, 5-minute candle — courtesy of StocksToTrade.com
Set a stop-loss just below VWAP to protect your capital and aim for a target price based on the potential of the stock’s breakout.
Consider the volume it’s trading, whether it has news, and look at past moves the stock has made to determine how far it could run.
VWAP is a powerful tool and indicator, but it’s not the only factor in trading.
Combine it with the use of technical analysis (and fundamentals if you’re swing trading) to build a well-rounded strategy.
If you can’t monitor your screens all day because of work or other commitments — make sure you catch tonight’s event to see how you can master the markets with swing trade opportunities.
Have a great day everyone. See you back here tomorrow.
Tim Bohen
Lead Trainer, StocksToTrade