TRADING WITH VWAP
INTRODUCTION
VWAP has more significance for intraday traders.
VWAP demonstrates the integrated price and volume behaviour of the stock in the last 3-4 days and the chart demonstrates how the last 3-4 days VWAP positions provide signals for Intra-day trading.
DESCRIPTION OF VWAP PARAMETERS
VWAP (Green line) is a very dynamic line that moves with every tick.
Lines 1 to 4 are fixed based on the EOD close of the VWAP lines. End of VWAP of previous day determines the start of Lines 1 to 4.
Line -1 : End of VWAP of Day - 4 Line -2 : End of VWAP of Day - 3 Line -3 : End of VWAP of Day - 2 Line -4 : End of VWAP of Day -1
However, Line 5 has three segments, namely A, B & C.
Line-5 (Part -A) This is VWAP of Day-2 , which shows movement with every bar, see where this part A ends , from same place line -3 starts
Line -5 (Part -B) This is VWAP of Day-1 , which shows movement with every bar .
Line -5 (Part -C) This is VWAP of Day-0 i.e Current date, which shows movement with every bar. It may be noted that 3 solid lines covering 3 days instead of only current day is to show nature of near term trend with respect to VWAP line.
HOW TO SET UP & FIND STOCKS
For identifying Stocks,
RUN the scan (Analysis Search Menu - > Scan VWAP) after EOD & IEOD data update in Intraday Mode. Sieve through all the stocks broadly, for the following:
TRADING WITH VWAP
1. Stock is in good trend in weekly charts/ daily charts
2. For all those stocks whose VWAP are very close for last 3-5 days (say around 1% variance), good momentum can be expected. (As shown in below chart of Coal India )
How to select stocks on basis of VWAP
1. Scan through all F&O stocks and identify stocks depending on how broader markets are moving. 2. There are certain stocks like HDFC, HDFC BANK, GMR infra, where VWAP does not work great. Ignoring
them, look for stocks which have shown a move in last 2-3 days. 3. Take a trade using VWAP depending on the following 3 conditions
a. If day’s VWAP is close enough on upside of BLUE (Line 2) & RED (Line 1) lines b. If day’s VWAP is close enough on downside of BLUE (Line 2) & RED (Line 1) lines c. If day’s VWAP is sandwiched between Lines 1 to Line 4.
4. Blue and red lines act as either stiff resistances/ stiff supports.
5. Hence, for next trading day, either if GREEN line comes near today’s VWAP and see some buying or if sustain above those blue & red lines then trade can be taken on Long side.
6. Similarly, if GREEN line sustains below those blue & red lines, trade can be taken on Short side.
Following are additional criteria for trading with VWAP
a. If during the first half of trading session, stock price stays below VWAP; and in second half if it crosses VWAP and stays above then there is 80% probability of that stock inching towards day’s HIGH.
TRADING WITH VWAP
g. If previous day’s VWAP provides a strong resistance to the upmove, then it’s a strong SELL. Vice versa for opposite move too.
h. Avoid all Intra-day ATS signals when using VWAP to avoid whipsaws
i. If prices are below Lines 1 to 4 and price is above VWAP (Green) line, avoid Buying as it is a sign of weakness. Buying is advised only above any 2 of previous VWAP resistances. Vice-versa for reverse condition.
j. Avoid shorting when VWAP line is above atleast any 3 previous days VWAP and vice-versa. They are either Buy on dip or Sell on rise opportunities.
k. Whenever stock has a good move on any day and then the next day if it trades in a small range, then small range day’s VWAP becomes very crucial for stock momentum to continue as that line will act as a good Support/ Resistance to take a good risk-reward entry.
l. During the reversal of a strong up trend or down trend make sure that atleast 2 VWAP lines are below price and VWAP (Green) line prior to entering a trade.
TRADING WITH VWAP
CASE STUDIES WITH CRITERIA SPECIFIED FOR TRADING
Tata Steel chart demonstrates condition a of the above criteria.
TRADING WITH VWAP
Canara Bank chart demonstrates conditions e and f of the above criteria.
