Anchored Volume Weighted Average Price (Anchored VWAP) provides valuable insights into price action and market dynamics. Developed by Brian Shannon, Anchored VWAP is a versatile and easy to use indicator that can be incorporated into various trading strategies.
VWAP
How It Works
Volume Weighted Average Price (VWAP) combines price and volume data to provide an average price for a specific asset over a specified period of time. This period of time is usually set to the market open. VWAP is calculated by dividing the sum of the product of price and volume by the total volume for the given period. The formula for VWAP is:
VWAP = Σ (Price * Volume) / Σ Volume
VWAP is displayed as a single line on a chart giving a clear visual representation of the average price at which an asset has traded throughout the day.
Advantages
- Easy to understand and interpret
- Provides a benchmark for trade execution, helping determine whether you are getting a favorable price
- Offers insights into liquidity and market sentiment
- Can be used as a dynamic support or resistance level
Limitations
- Less effective for longer timeframes, as it resets daily
- Inherently lagging indicator, as it relies on past data
- Does not account for significant market events that can impact price and volume
Anchored VWAP
How It Works
Anchored VWAP is an extension of the traditional VWAP but allows you to anchor the indicator to a specific event or starting point. By doing so, Anchored VWAP provides a more accurate representation of the average price over a specified time frame, considering the impact of key events such as earnings announcements, news releases, or technical breakouts. The calculation remains the same as the regular VWAP, with the difference being the choice of the anchor point.
Differences Between VWAP And Anchored VWAP
- VWAP is primarily used for intraday trading, whereas Anchored VWAP can be applied to various timeframes, making it more versatile.
- VWAP resets daily, while Anchored VWAP can be anchored to any specific event or date, providing a more customized and relevant analysis.
- Anchored VWAP considers the impact of significant market events, offering a more comprehensive view of the asset’s price action.
Advantages:
- Customizable and adaptable to different timeframes and trading strategies
- Considers the effect of key market events on price and volume
- Can be used in conjunction with other technical indicators for enhanced analysis
- Offers potential entry and exit points for trades
How To Trade with Anchored VWAP
Identifying Key Events For Anchoring
Earnings announcements
Earnings announcements can lead to significant price and volume fluctuations. Anchoring the VWAP to the day of the earnings release can help you assess the market’s reaction and identify potential trading opportunities.
News releases
Important news releases, such as economic data or company-specific updates, can impact an asset’s price and volume. Anchoring the VWAP to the news release date can provide insights into how the market has factored in the new information.
Technical breakout/breakdown points
Anchoring the VWAP to significant technical levels, such as a breakout above resistance or a breakdown below support, can help monitor the strength of the trend and identify potential reversals or continuation patterns.
Incorporating Anchored VWAP Into Trading Strategies
Trend Confirmation
Anchored VWAP can be used to confirm the direction of a trend. If the price is consistently trading above the Anchored VWAP, it signals an uptrend, while trading below the Anchored VWAP indicates a downtrend.
Support and Resistance Levels
The Anchored VWAP line can act as dynamic support or resistance levels. You can use these levels to identify potential entry or exit points and stop-loss or take-profit levels.
Risk Management
Incorporating Anchored VWAP into risk management strategies can help assess the potential risk-reward ratio of a trade. By comparing the entry price to the Anchored VWAP, you can determine whether a trade offers a favorable risk-reward profile.
Combining Anchored VWAP With Other Technical Indicators
Moving Averages
Combining Anchored VWAP with moving averages, such as the 50-day or 200-day moving average, can give you additional confirmation of trends and potential reversal points. For example, a crossover between the Anchored VWAP and a moving average may signal a change in trend direction.
Relative Strength Index (RSI)
RSI is a popular momentum indicator that measures the speed and magnitude of price movements. By combining RSI with Anchored VWAP, can identify overbought or oversold conditions in the context of the average price, potentially leading to better entry and exit points.
Fibonacci Retracement Levels
Fibonacci retracement levels are used to identify potential support and resistance areas within a trend. By combining Anchored VWAP with Fibonacci levels, you can gain insights into the strength of the trend and potential reversal points. For instance, if the price retraces to a key Fibonacci level and coincides with the Anchored VWAP, it may indicate a high-probability trading opportunity.
Platforms Setup and Examples
Setting Up Anchored VWAP On Popular Charting Platforms
TradingView:
To add Anchored VWAP to your TradingView chart, follow these steps:
a. Click on the drawing tools in the top left corner of the chart.
b. Select Anchored VWAP
c. Anchor VWAP to a desired event or date on the chart.
ThinkorSwim (TD Ameritrade):
To add Anchored VWAP to your ThinkorSwim chart, follow these steps:
a. Click on the “Studies” button at the top of the chart.
b. Choose “Edit Studies” and search for “Anchored VWAP” in the search bar.
c. Double-click on the “Anchored VWAP” option to add it to your chart.
d. Adjust the anchor point by clicking on the “Settings” icon and selecting the desired event or date.
MetaTrader 4/5:
Anchored VWAP is not natively available on MetaTrader 4/5. However, custom indicators can be downloaded from the MQL5 marketplace or other sources. Follow these steps to install a custom Anchored VWAP indicator:
a. Download the custom Anchored VWAP indicator (ensure it is compatible with your MetaTrader version).
b. Place the downloaded indicator file in the “Indicators” folder of your MetaTrader installation directory.
c. Restart MetaTrader and navigate to the “Navigator” panel.
d. Locate the Anchored VWAP indicator under the “Custom Indicators” section and drag it onto your chart.
e. Adjust the anchor point as needed by double-clicking on the Anchored VWAP line and selecting the desired event or date.
Anchored VWAP Chart Example
In the featured image above, you can see how the VWAP is anchored to the beginning of the year on a daily chart of Coinbase (COIN). The VWAP line serves as a magnet, attracting the price as it tends to gravitate back towards it after overextending. Take note of how the price became significantly overextended before eventually declining and finding support. The line continued to act as a support even two months after its anchor point.
Adjusting The Anchor Point And Timeframes
Choose the right anchor point
Selecting an appropriate anchor point is essential to accurately use Anchored VWAP. Key events such as earnings announcements, news releases, and significant technical levels are often used as anchor points.
Experiment with different timeframes
Anchored VWAP can be applied to various timeframes, making it a versatile tool for different trading styles. Experiment with different timeframes to find the one that best suits your trading strategy.
Regularly review and adjust anchor points
As market conditions change, it’s essential to periodically review and adjust your anchor points to ensure the Anchored VWAP remains relevant to your analysis.
Frequently Asked Questions about Anchored VWAP
How To Choose The Right Anchor Point?
Choosing the right anchor point is crucial for an accurate analysis using Anchored VWAP. Consider the following factors when selecting an anchor point:
Significant market events: Anchor the VWAP to key events that have a considerable impact on price and volume, such as earnings announcements, news releases, or economic data releases.
Technical levels: Use major technical levels, such as breakouts above resistance or breakdowns below support, as anchor points to assess the strength of trends and identify potential reversals or continuation patterns.
Start of a trend: Anchor the VWAP to the beginning of a new trend, as it helps in understanding the average price level since the trend’s inception.
Personal trading strategy: Align your anchor points with your trading strategy and goals. The anchor point should be relevant to the specific timeframe and market conditions you are analyzing.
Can Anchored VWAP Be Used For All Types Of Assets?
Yes, Anchored VWAP can be used for various types of assets, including stocks, ETFs, futures, forex, and cryptocurrencies. As long as the asset has sufficient price and volume data, the Anchored VWAP can be applied to provide insights into its average price and market sentiment. However, it’s important to note that the effectiveness of Anchored VWAP may vary depending on the liquidity and volatility of the asset in question.
Is Anchored VWAP Suitable For All Timeframes?
Anchored VWAP is a versatile indicator that can be applied to multiple timeframes, making it suitable for different trading styles, including intraday, swing, and position trading. However, its effectiveness may vary depending on the timeframe used.
For intraday trading, Anchored VWAP can provide valuable insights into short-term price action and help identify potential entry and exit points throughout the trading day.
For swing trading and position trading you may find Anchored VWAP helpful in confirming the direction of the trend and identifying potential support and resistance levels over longer timeframes.
Conclusion
Anchored VWAP is a powerful and versatile technical indicator that builds upon the traditional VWAP concept by allowing you to anchor the indicator to specific events or dates. This customization makes it relevant and useful across various timeframes and asset types. Anchored VWAP can be used to confirm trends, identify dynamic support and resistance levels, and assess the overall market sentiment.
