VWAP Mean Reversion

Entry Logic

• Long Entry: Price is significantly below VWAP and shows signs of reversing.
• Short Entry: Price is significantly above VWAP and shows signs of reversing.
• Confirmation: A reversal candle pattern (hammer, shooting star) forms.
• Timeframe: 5-minute.
• Location: At a standard deviation band of VWAP or a key support/resistance level.
• Market Condition: Any, but the target is VWAP.

Exit Logic

• Profit Target: VWAP.
• Scaling Out: Exit 50% at VWAP, trail the rest for a potential trend day.
• Trailing Stop: A moving average or bar-by-bar stop.
• Signal Failure: Exit if price makes a new low/high against the trade.
• Opposite Signal: Not applicable.
• Time Expiration: End of day.
• Momentum Loss: Exit if price fails to move towards VWAP.

Stop Loss Structure

• Hard Stop: Below the low of the entry candle.
• Soft Stop: If price closes further away from VWAP.
• Max Dollar Loss: $500.
• Max Percent Loss: 1%.
• Structural Stop: Beyond the session high/low.

Risk Management Framework

• Risk Per Trade: 0.5%.
• Daily Limit: 3 losses.
• Weekly Limit: 4%.
• Max Drawdown: 12%.
• R:R Requirement: 2:1.

Position Sizing Model

• Sizing Approach: Fixed fractional.
• Volatility Adjustment: Adjust size based on the distance to the stop loss.
• Conviction Sizing: Larger size for A+ setups with multiple confluences.
• Scaling In: Not recommended.
• Scaling Out: Yes, at VWAP.

Trade Filtering

• Market Conditions: Best when VWAP is relatively flat.
• Setups: Look for exhaustion candles at key levels far from VWAP.
• Instruments: Liquid stocks and ETFs.
• Time Restrictions: Avoid the first 5 minutes of trading.
• Chop/News Avoidance: Yes.

Context Framework

• Trend Direction: The trade is counter-trend to the short-term move, but with the expectation of returning to the mean.
• VWAP Relationship: This is the core of the strategy.
• MA Relationship: Price is likely extended from all MAs.
• Range Location: At the extremes of the daily range.
• Higher TF Alignment: Not essential.

Trade Management Rules

• Breakeven: After a 1R move.
• Scale Out: At VWAP.
• Add Size: No.
• Fast vs Slow Moves: Catches reversals of fast moves.

Time Rules

• Optimal Window: Any time after the first 15 minutes.
• Times to Avoid: Opening range.
• Session Notes: VWAP is a session-based indicator.

Setup Classification

• A+ Setup: Price at a VWAP standard deviation band that aligns with a major support/resistance level.
• A Setup: Price at a VWAP standard deviation band with a reversal candle.
• B Setup: Price is simply far from VWAP and stalling.
• C Setup: Price is trending strongly away from VWAP with no signs of stopping.

Market Selection Criteria

• Instruments: Any liquid stock, ETF, or future.
• Volume: > 1 million shares daily.
• Volatility: Moderate.

Statistical Edge Metrics

• Win Rate: 60%.
• Avg Win: 2R.
• Avg Loss: 1R.
• Profit Factor: 1.8.
• Expectancy: +0.4R.

Failure Conditions

• Market Conditions: A strong trend day where price never returns to VWAP.
• Specific Scenarios: A stock gapping and running in one direction all day.

Psychological Rules

• Discipline: Trust VWAP as the "fair price" and fade deviations from it.

Advanced Components

• Regime Detection: Identify trend days vs. range days early.
• Filters: Use VWAP standard deviation bands to quantify "far".
• Correlation: Be aware of how the broader market is behaving relative to VWAP.
• MTF Alignment: Not applicable.

Location

• Strongest: In stocks that are heavily traded by institutions.
• Weakest: In illiquid, story-driven stocks.