This is not the first time we are covering the VWAP indicator, in our previous content, you can find basic information regarding it. So, today we’ve come up with a more detailed discussion of it. Apart from the discussion, we will demonstrate VWAP Trading Strategy For Zerodha Traders. Especially short-term term traders use this indicator with full dedication as it performs quite well in intraday as well as short-term trading analysis. Let’s discuss step by step to make the concept clear.
What is the VWAP Indicator?
VWAP, or Volume-Weighted Average Price, is an indicator commonly used in the stock and other financial markets to assess the overall market sentiment of security. It takes into account both price and volume when averaging out prices over time, thereby providing an indication of the mean value of the stock throughout its trading session. VWAP can be calculated using historical data for increased accuracy and understanding of where prices have been historically.
The calculation process is adding up the rupees (traded for per day transaction), in short (Price x No of shares traded), and then dividing it by the total shares traded for the day.
VWAP Indicator on Zerodha Trading Platform
After stating the trading strategy we will move to the Zerodha reference. So this post requires that you should have a Zerodha account. If you do not have a Zerodha account click here to get one.
VWAP Trading Strategy
In order to analyze the real-time market trend, a proper VWAP trading strategy is required. Here is the list below:
Traders must know the importance of entry and exit timings. These two play an important role in the trading system. Entry and exit point matters most in a profitable trade. Here, in the basic strategies, you will come to know about the buying and selling entry-exit points.
Buy When the Price Moves Above VWAP
According to the strategy, the best time to buy a stock is when the price level is above VWAP. This indicates the majority of the intraday positions are in profit and the buyers are in control.
Sell When the Price Moves Below VWAP
The strategy is exactly the opposite of the earlier one. Here, when VWAP is above the price level or in other words, the price is below the VWAP line, it’s the time for selling. It means the sellers are in control.
VWAP Crossover Trading Strategy
The crossover system is also considered one of the important trading strategies for intraday or short-term traders. When the price crosses the VWAP line from the downside, it always tends to move in the upward direction. On the other hand, when the price line crosses VWAP from the upside, it always tends to move in a downward direction.
Supertrend Indicator with VWAP Trading Strategy
Supertrend is quite a popular indicator among intraday traders, it is well-known for its buy-sell signals. Traders can do an efficient as well as profitable trade by the application of both Supertrend and VWAP indicators. The strategy is quite easy if the price is above VWAP and there is also a buying signal from Supertrend, it indicates that the market trend is strongly bullish and vice versa.
VWAP Bounce Trading Strategies
This is another strategy with much accuracy. Many analysts notice that sometimes, prices come to test the VWAP line and bounce back to their previous level. It’s called bounce-back trading strategies. Buyers often buy or sell a stock at the touching point of the price and VWAP indicator.
As I have stated above that the Volume Weighted Average Price moves up or down based on the volume and price action throughout the day. If you notice carefully, you can see in the early hour of the market, it is more sensitive to the market movement in comparison to the closing hour.
It’s been said that the Volume Weighted Average Price is the equilibrium of a stock. Hence, if a stock price moves too far away from it, it will always come back to it.
VWAP-Support and Resistance Trading Strategy
The indicator acts both as a support and resistance level but in different dimensions. When the price trades below the indicator, the VWAP line acts as a resistance level. The opposite happens when the price trades above the indicator, the VWAP line acts as a support level.
Why We Prefer Zerodha Trading Platform?
The above charts are taken from the Zerodha Kite platform where you can get multiple charts, indicators, and oscillators for analyzing the market effectively. if you are a Zerodha account user, you can use all of these tools and techniques free of cost. The trading platform provides real-time data and charts for trading.
Limitations of the VWAP Trading Strategy
Though you can use this specific indicator in numerous ways, still it has certain limitations. It only works best for intraday traders, there is no use of it in the mid or long-term investment. It acts more as an analytical tool than a trade signal tool. As stated above that the indicator is less sensitive in the late market hour. Though it works wonderfully the after the closing of the market data analysis, the market opening hours are best for it.
In conclusion, I’ve tried to place examples of different VWAP trading strategies. There you can get examples of the perfect bullish-bearish trend, buy-sell signal, bounce trading strategy, support-resistance, etc. Each chart’s time limit is 5 as the volume-weighted average price mainly works for intraday trading.
Though VWAP is not an exact science, it helps to predict the market as well as a stock’s movements to some extent. With the help of the indicator, traders can surely minimize the trading risk.