technical analysis

Rules based Day Trading Strategy - Using VWAP Indicator

Daksh Murkute | | |

I understand that finding a good trading strategy is not so easy but here is a strategy for you that you can use for yourself and maybe make some profit too.


This strategy has a 53.33% win rate, 1:1.5 RRR, and within such a month or so of testing, it has generated a return of 35% by risking just 1% every trade.


In this blog post, I’m going to explain this strategy to you entirely along with all the rules that you’ll need to follow.


In the end, I will also discuss the backtest results of this strategy through the data I have recorded in the excel sheet.




What was my rationale behind this strategy?

So I had read this somewhere that trends are formed in the London session, but then the same trend reverses during the London and New York overlap session, which then continues in the New York session.


This doesn’t necessarily happen each and every time but yes, it happens a lot and I wanted to test this theory.


I tested this theory for some time and found that it actually is a thing and we can capitalize on the trend reversal during the overlap session.


I then worked around some indicators, finally landed on one, observed price action, and then made some rules for the strategy.


I’ll tell you which indicators you have to use for this strategy and also how they are to be used, so stick around till the end.



Which indicators are to be used?

The first indicator that you’ll need to use in this strategy is the sessions indicator.


Just type sessions in the indicators search bar in TradingView and you’ll get a list of indicators. Click on the one by JrFxAddict. You can use other ones too, but I just liked this one.


Which indicators are to be used?


This is how your chart will look after you apply the sessions indicator.


Which indicators are to be used?


The next indicator that we have to use is the VWAP indicator.


To apply this indicator, just type VWAP in the indicators search bar in TradingView and you’ll see that it is an inbuilt indicator and we will use that one.


Which indicators are to be used?


Click on it and it’ll get applied to the chart. I like to change the color of the lines to black and I also increase its thickness a bit. It’s not something that you need to do too.


This is how your chart should look after you apply both the indicators.


Which indicators are to be used?


Our chart is now set and we are ready to move on to the rules of this strategy.



What are the rules of the strategy?

I am a huge believer in trading with proper rules and sticking to them all the time. That’s why I have made rules for this strategy that will cover everything and will make it easy for you to trade this strategy.


Rule no.1: We will trade this strategy on the 1 min timeframe only.


The 1 min timeframe is very nice to trade this strategy as it allows us to capitalize on quick price action.


What are the rules of the strategy?


Rule no.2: We will trade this strategy during the Overlap session only.


That’s the very reason why I have included the sessions indicator in this strategy, to make it easy to differentiate the sessions.


What are the rules of the strategy?


It’s now time for Rule no. 3 and it is regarding trade entries and I’ll tell you how exactly that will work in this strategy.


We are mainly looking for the price to be below the middle line and then close above the middle line for a long entry.


Or we would want the price to be above the middle and then close below it for a short entry.


What are the rules of the strategy?


This is the very crux of our strategy and that’s how we take entries whenever the opportunity arises.


Now, look at this GBPUSD chart.


What are the rules of the strategy?


As you can see, the price was below the middle line and then closed above it.


Rule no. 4: no matter where the candlestick closes, either above or below the middle line, we will enter only at the price level of the middle line.


What are the rules of the strategy?


Rule no. 5: In the case of a long trade, the SL will be placed at the lower line, and in the case of a short trade, the SL will be placed at the upper line.


Rule no. 6: We will target 1:1.5 RRR in all our trades.


Just see how quickly the price went on to hit our target and we got out with a quick and decent profit.


The rules haven’t finished yet though, we have a couple of more rules to follow.


I made these rules because, without them, the win rate was decreasing which meant lesser returns. But after following these rules, if just have better results in total.


Rule no. 7: We will not take any trade if the price had touched the middle line within a window of 15 minutes before the Overlap session started.


Rule no. 8: We will take only trade per major currency pair in a day by using this strategy.



Some trade examples

I have already shown you a long trade example. So here’s a short trade example.


What are the rules of the strategy?


This is a valid and also a successful trade in the USDCHF pair.


As you can see, all of our rules were met here and that is why I said that it is a valid trade.


Here’s one more example.


What are the rules of the strategy?


As you can see, this trade met all our rules, but it still was a loser.


I am showing you this trade to tell you that this strategy won’t win all the time and you will have losers.


But overall this strategy has been a winner, at least during the time period I tested this strategy.




Backtest results review

When I say that I have tested this strategy, I actually have done it, and that too quite extensively.


Backtest results review


I tested this strategy on all 7 major currency pairs from 14th December 2021 till 24th January 2022.


We had 105 valid trades out of which 56 ended up in the green and 49 ended in red, our win rate here 53.33%, and we have netted a cool 35% within this short period.


Oh yes, 35% gains, if you’d risk 1% per trade and if you risked 2%, well then the gains would double, and you’d end up with 70% in profits.


By the way, if you look at the daily performance of this strategy then you’ll see that the maximum profit that you could have earned with this strategy would be 9% while the max daily loss would have been 5%, and on average you would’ve made around 1.17% per day.


Backtest results review


So this was all about this complete rules-based day trading strategy that has been tested on over 100 trades and has ended up being profitable.



What do you think?

Do let me know if you liked this strategy or not and if you would be interested in learning more about such strategies?


Also, let me know if you want the excel backtest sheet and maybe we could share it with you.


Don’t forget to share this blog post with others and let them also test this strategy out for themselves.


Feel free to reach out to me for absolutely anything through the comments section below and I’ll get back to it at the earliest.

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