VWAP Absorption Pattern

Entry Logic

Entry triggers when price approaches VWAP and exhibits a series of small candles (absorption) at VWAP, followed by a strong candle bouncing off VWAP. Confirmation is a 1-minute candle closing decisively away from VWAP. Timeframe is 1-minute chart. Location context is price consolidating at VWAP. Market condition is trending or mean-reverting.

Exit Logic

Profit target is 1.2R. Scale out 50% at 0.8R. Trailing stop moves to 0.4R once 0.8R is hit. Signal failure is a 1-minute candle closing on the wrong side of VWAP after the absorption. Time expiration is 25 minutes if target not hit. Momentum loss is 4 consecutive 1-minute candles failing to make new highs/lows.

Stop Loss Structure

Hard stop is 0.3R from entry price. Max dollar loss is $150 per trade. Max percent loss is 0.3% of account. Structural stop is 2 ticks beyond the low/high of the absorption candles.

Risk Management Framework

Risk per trade is 0.3% of account. Daily loss limit is 1.2% of account. Weekly loss limit is 3% of account. Max drawdown is 6%. R:R requirement is minimum 1.2:1.

Position Sizing Model

Sizing approach is fixed fractional. Volatility adjustment uses 0.6 ATR for stop placement. Conviction sizing is 1.1x standard size for A+ setups. Scaling in is not permitted.

Trade Filtering

Market conditions are clear trends or defined ranges. Setups are absorption at VWAP. Instruments are high-volume stocks, futures. Time restrictions are 10:30 AM to 2:30 PM EST. Avoid news. Avoid thin markets.

Context Framework

Trend direction on 5-minute chart must be established. VWAP relationship is price finding support/resistance at VWAP. MA relationship is 9 EMA and 20 EMA in alignment with VWAP. Range location is often at the extremes of a short-term range. Higher TF (15-minute) shows price respecting VWAP.

Trade Management Rules

Move to breakeven when price moves 0.3R. Scale out 50% at 0.8R. Do not add size. Fast moves allow for aggressive profit taking. Slow moves require tight management.

Time Rules

Optimal window is 10:30 AM to 11:45 AM EST and 1:30 PM to 2:30 PM EST. Avoid 12:00 PM to 1:00 PM EST. Session notes: Mid-day often sees absorption.

Setup Classification

A+ criteria: Clear absorption, strong bounce candle, high volume on bounce. A criteria: Clear absorption, good bounce candle, good volume. B criteria: Absorption, moderate bounce, moderate volume. C criteria: Weak absorption, low volume.

Market Selection Criteria

Instruments are ES, NQ, SPY, QQQ. Volume must be consistently high. Volatility must be moderate, not extreme.

Statistical Edge Metrics

Win rate target is 65%. Average win is 1.2R. Average loss is 0.3R. Profit factor target is 2.6. Expectancy is 0.65 * 1.2 - 0.35 * 0.3 = 0.675.

Failure Conditions

Strategy fails if the absorption turns into a full breakout. Strategy fails if the bounce has low volume. Strategy fails if market turns choppy after absorption.

Psychological Rules

Patience is essential. Wait for clear confirmation. Do not force trades. Trust the process.

Advanced Components

Regime detection uses volume profile at VWAP. Filters include no entry if absorption candles are too large. Correlation with bond market for interest rate sensitivity. MTF alignment: 1-minute entry, 5-minute and 15-minute for trend.

Location

Strongest when absorption occurs after a strong move towards VWAP. Weakest when absorption occurs in a very tight, low-volume range.