Anchored VWAP: Definition, Usage & Strategy

What is Anchored VWAP?

Anchored volume weighted average price or simply AVWAP is a previous meaningful benchmark price on a chart selected by traders. It quantifies the average price a market has traded at, through a time frame, on the basis of both volume and price. This metric is crucial as it provides traders with an imagery into the nature of the trend. It also shows the average technical value of a stock from an indicated starting mark. Let’s deep dive into Anchored VWAP in this article!

Old resistance can turn into new support as traders that omitted the breakout purchase their second opportunity to take part at that price as one example. A lot of price action taking place at one price level can establish new price action dependent on past memory in the future dependent on an anchoring bias. Individuals that missed a gap breakout may be willing to purchase when price returns to the initial level of the gap. .

The VWAP line indicates one line on a chart anchored to a selected starting mark and can be for any time period. Some traders adopts the VWAP as one filter for their trend trading rules. It has turned into a famous tool for numerous day traders on intraday charts.

The formula for the anchored VWAP is calculated by beginning at the selected benchmark and combining together all the dollars traded in a market for all the transactions. It then divides all the dollars by the total shares traded. The Anchored VWAP line on a chart shows the quantified volume weighted average price for a time frame, starting from a selected starting point. This calculation is denoted as a line on the chart that moves and adjusts to new information as it is developed.

Anchored VWAP Calculation

The Anchored VWAP calculation is carried out using the same formula as traditional VWAP. The only difference is in the bars that are added in the calculations.

With traditional VWAP, the calculation begins with the first bar of the day and concludes with the last bar of the day. Because it only includes one trading day of data, traditional VWAP can be implemented only on intraday charts.

With Anchored VWAP, the chartist selects the first bar to adopt in the calculation (“anchoring” the indicator to that bar), and the final bar is always the most recent bar available. As a result of the more flexible commencement and concluding points, Anchored VWAP is not restricted to intraday charts.

Standard deviation bands can also be developed beginning at an anchored VWAP commencing point using Fibonacci marks and percentage bands. This is one means to quantify reversion to the mean trades.

The older the anchored VWAP commencement point gets on the chart, the lesser the AVWAP line will react to it and change based on it because so much price information is associated with the formula. Closer AVWAP points forms more reasonable lines of support and resistance most times.

The AVWAP is a technical indicator that put together price, volume and time. This triple layered indicator is able to smooth price data and calculate the sentiment and trend with time from a key inflection point.

The AVWAP can be implemented much like a moving average for trend trading dependent on direction and slope. As well as seeing how far price is stretched from the mean price by including standard deviation bands around it.

VWAP vs. Anchored VWAP: What’s the difference between the two?

VWAP

You need some basic knowledge of what vwap is to begin with. It is a lagging indicator, which informs you of where most buys and sells for any given ticker have taken place on average as price changes throughout the day.

Anchored VWAP

How the two differ involves the anchor. VWAP is a moving indicator using intraday, commencing with the first bar and concluding with the last bar of the day. Conversely, Anchored vwap is tethered to a specific bar. It shows the cumulative difficulties of bulls and bears from that bar.

The Significance of Anchored VWAP

The significance here is the underlying revelation of who is having difficulty and who is feeling convenient. Shorts had the upper hand for months, but as soon as the price of the stock began to ascend back to their “average” price, it became visible that shorts were in a mess. Millions of shares aren’t covered easily when a stock float is as little as 15 million, like SPRT.

This commences the game of averaging high to save the position. But with all effort to re-average, the situation becomes messier. And if the demand fails to let up, the final result can be disastrous as margin calls pour in. Then brokers begin to cut their losses by covering their client’s position.

Three Anchored VWAP Strategies

Let’s examine the three specific strategies you can use with the anchored VWAP indicator.

1. Red to Green Moves

This is a really easy strategy just like the example we used above with SPRT. The strategy revolves around a move from being beneath the avwap to being above it. In other words, what was initially resistance has turned into support, or longs who were red, are now green.

This can be achieved in favor of shorts also. If buyers and bag holders are averaged above the current avwap marks, it is possible for the key average to provide resistance on any rallies into it.

2. Green to Red Moves

The fantastic thing about vwap is that it basically turns into the precipice of a move in either direction. In other words, you can play avwap to the short side as soon as a resistance is broken. Hence, the longs that were initially green now turns into red.

3. Range Based Trades Using Anchored VWAP

Range trading can give excellent chances for short term trades. Often, trading ranges can be simply indicated by a quick view at a chart observing support and resistance. But with avwap, you’ve got an additional layer of verification to include to your trades.

How to Practice With the AVWAP

Practicing is the secret to making success in the markets. It pointless and unreasonable putting your hard-earned money to risk in the trade markets before you’ve perfected a pattern.

One of the best approach to practice with avwap is to place it on your charts. Then you can shift the “anchor” around and observe what takes place. Where does it support? Where does it break? Can multiple avwaps on a chart give larger clues to where long term money is situated? You should attempt to answer these questions.

Like Brian Shannon, you’re recommended to take the indicator and tag it to the significant areas of the chart such as highs, lows, big volume days, events, etc.

As with any indicator, the default settings are usually the most common, but it wouldn’t hurt to play around with it to get a feel.

Conclusion

Anchored VWAP gives all the same advantages of traditional VWAP in defining support and resistance levels. It has the additional advantage of you being able to locate the exact timeframe to study. Starting VWAP calculations at the time of a important turning point enables you to remove price action that was driven by another market psychology.

As with all other technical indicators, traders should pair the Anchored VWAP alongside other indicators and analysis techniques.