VWAP Indicator Intraday Trading Strategy

Learn to use VWAP profitbaly (with example) →

Hey there 👋🏼

Predicting the markets over the long term may be feasible for some, but over the short term, it’s next to impossible. That’s why intraday trading is one of the most difficult styles of trading.

The use of multiple indicators generating numerous signals can create more confusion and further complicate the process.

But there is a simple indicator that can be used for a profitable intraday strategy if used rightly - the VWAP.

Understanding the VWAP Indicator

The volume-weighted average price (VWAP) is a single-line indicator that represents the average price of a stock, calculated based on the prices and volumes over the trading period. It is calculated as:

VWAP = (Cumulative Typical Price * Volume) / Cumulative Volume

where Typical Price = (High Price + Low Price + Closing Price) / 3

Providing insight into both, the trend and value of a security, the VWAP indicator is very useful for short-term, intraday traders, since it helps in determining the average price for the day.

Implementing the Strategy (with example)

The novice will apply a strategy of buying when the price crosses above the VWAP line and selling when it crosses below the line. But this can generate a lot of false signals.

We will use the VWAP indicator in a 15-minute timeframe for this strategy.

Long Trade

First, filter out the top 10 gainers during opening. It’s best to scan this at 9:30 am, after the initial opening bell volatility settles.

1) Look for a bullish candle that closes above the VWAP line.

2) A buy signal is generated when the second candle closes above the high of the first candle.

3) A stop loss can be placed at the low of the first candle. It can be trailed as & when new higher lows get formed.

> Profits can be booked when one of the trailing stop-losses gets hit or a bearish pattern is formed.

Short Trade

First, filter out the top 10 losers during opening. It’s best to scan this at 9:30 am, after the initial opening bell volatility settles.

1) Look for a bearish candle that closes below the VWAP line.

2) A sell signal is generated when the second candle closes below the low of the first candle.

3) A stop loss can be placed at the high of the first candle. It can be trailed as & when new lower highs get formed.

> Profits can be booked when one of the trailing stop-losses gets hit or a bullish pattern is formed.

It’s better to set your stop loss at a round figure. For example, if your stop loss as per charts comes at 43.5, choose to set your stop loss at 43. This practice will help prevent the price from jumping your stop loss.

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Example: Long Trade in IRCTC

Below is the chart of IRCTC with a 15-minute timeframe. The first candle formed on 17th November 2023 closed above the VWAP line, forming the first candle for our strategy (highlighted with a blue circle). The next candle broke the first one’s high, triggering an entry according to the rules.

Initially, the stop loss was set at the first candle’s low. It later got trailed as and when higher lows were formed (highlighted in red). The second 15-minute candle of 20th November 2023 broke the latest formed stop-loss, triggering an exit.

The entire trade gave a return of ~2.6% in 3 days ⬇️

Avoid trading stocks with a large gap down using this strategy.

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