Backtesting Vwap intraday strategy – Part 2

This article covers the 2nd part of the Vwap intraday strategy with a stock selection logic.

Please read the first part of the discussion here VWAP – Part 1

The strategy rules are different here as opposed to the the part-1 logic.

1. The main change here is we are going to select a few stocks to be traded for the day instead of trading in all Nifty 50 stocks.
2. Another important change is its a breakout strategy. We take trade on breakout or breakdown of selected 15 minute candle high or low unlike taking a trade after  candle close.

Strategy Rules:

Timeframe: 15 minute

Its a breakout strategy.

Ignore first 15 minute candle after market opens to avoid noise in the market.

Stock Selection: Wait till 15 minutes after market opens. That means we need to wait till the first 15 minute candle is closed. Now at 09:30 AM choose top 2 gainers and top 2 losers from the Nifty 50 stocks. That means on any given day we are going to trade in 4 stocks at max.

Long Trade:

• First identify the decision candle on which we need to apply breakout rule. The decision candle is the one that passes through the VWAP line and closes above the VWAP line for taking long trade. Do not consider a candle if it does not touch the VWAP line.
• When the stock price breaks out the decision candle high enter a trade at high of decision candle.
• Stoploss: Low of the decision candle
• Target: Risk to Reward 1:2
• Square off trade at 3:15 PM if no SL or target hits (15 minutes before market closes)

Short Trade:

• First identify the decision candle on which we need to apply breakdown rule. The decision candle is the one that passes through the VWAP line and closes below the VWAP line for taking short trade. Do not consider a candle if it does not touch the VWAP line.
• When the stock price breaks down the decision candle low enter a trade at low of decision candle.
• Stoploss: High of the decision candle
• Target: Risk to Reward 1:2
• Square off trade at 3:15 PM if no SL or target hits (15 minutes before market closes)

Capital: We are going to assume the total capital as 1 Lakh (1,00,000) for trading max 4 stocks on any given day. We risk only 1% of 1 Lakh on each trade i.e. the risk on each trade is 1,000. On a worst day if all 4 stocks hit stoploss then our max loss would be 4% for that day on total capital.

Back test Period: 01-01-2022 To 24-10-2024 (Approx. 3 years)

Charges: All charges like brokerage, STT, exchange transactions are considered while running back test.

Slippages: This back test does not account any slippages that we encounter in live trading.

Please note we don`t take another trade in the same stock after first trade SL hits.

To keep the back test simple, buffer (delta) value is not considered in this back test. Buffer is some extra value that we consider just above or below the breakout line.

Back test results:

Here is the back test summary report. All the statistics mentioned in below screenshot are self-explanatory.

The overall outcome is negative. If you would have traded this strategy in the last 3 years even with strict discipline and risk management you would have lost around 60% of the capital and experiencing a max drawdown of whopping 77%. If you look the numbers closely, the strategy actually made a 200% return in the 3 years but the irony is that the charges are more than the profit made thus pushing the overall outcome into negative territory. 

Conclusion: One should not blindly start trading a strategy even though its a profitable system without considering the charges. So make sure to ask the person to provide the complete back test report including charges when you are buying a course or strategy from anyone as most of the trading gurus out there do not provide you such reports. In a hindsight, when you analyze a chart for few days or weeks with some rules told by someone it makes you feel that its actually working. But when you extend your analysis to over 6 months or few years then the real picture will surprise you. Also when you started including charges you will experience double surprises. 

I am providing you the complete back test report in the form of downloadable excel file at the bottom of the post.

The back test report contains following sheets:

1. Trades: All trades with entry, exit, start and end timestamps, pnl, charges, net pnl etc.
2. Symbol wise Pnl
3. Date wise Pnl
4. Date & Symbol wise Pnl
5. Month wise Pnl
6. Month & Symbol wise Pnl
7. Year wise Pnl
8. Year & Symbol wise Pnl
9. Win Loss Ratio of each stock
10. Summary report with important data.

I hope this would be helpful for you guys to do some further analysis.

Download Back test Report:

BackTest_VWAP_V2_2022-01-01_to_2024-10-24.xls