The Power of Anchored VWAP Unveiled

Complete Guide to Anchored VWAP Indicator

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Anchored VWAP

What Is Anchored VWAP

This Ninja Trader Anchored VWAP add-on  is a variation of the VWAP indicator (one of the popular technical indicators ) that uses a specific time and price level as an anchor point, or starting point, rather than the beginning of the current session or trading day. The anchor point can be a significant high or low point in the price action, a pivot level, or any other point of interest. The purpose of the Anchored VWAP is to provide a more targeted view of the market, allowing traders to identify entry and exit points for a trade based on the weighted cost average of a financial security.

Similar to VWAP, The AVWAP computes the average price of a security relative to its volume over a period of time.

Given the utility of VWAP in trading, one might wonder: what necessitates the existence of AVWAP when VWAP already provides similar insights?

Well, let’s get to the heart of the issue:

While the Volume Weighted Average Price (VWAP) serves as a robust tool for technical analysis in trading, it encounters a notable constraint – its sensitivity to the factor of time. This is where the Anchored VWAP (AVWAP) steps in, offering a refined perspective by allowing traders to set a specific starting point for their analysis, thus overcoming the temporal limitation inherent in the standard VWAP approach.

The VWAP is designed to reset with the beginning of each trading day, making it applicable from the opening to the closing candle of a session.

This feature is particularly beneficial for day traders, but for those looking to hold positions over multiple days, VWAP falls short. This limitation is precisely where AVWAP comes into play.

In contrast to VWAP, the Anchored VWAP extends its utility beyond a mere single session. Anchored VWAP allows the trader to choose their own starting bar. The overlay is typically started at a significant high or low, news,economic announcement, or some other indicator of a change in market psychology. This way, VWAP is calculated using only price action since the significant event occurred.

Because the starting bar is chosen by the trader, and the ending bar is the most recent bar available, Anchored VWAP can span multiple days. Since this version of the overlay is not confined to a single trading day, Anchored VWAP can be used on daily charts as well as intraday charts.

Blue line is the anchored Avwap and the STD(standard deviations bands) from the last swing low of the new year.

Can be anchored at any point of the chart and also can choose the calculation methods

8 calculation methods for AVWAP

    • High + Low + Close / 3
    • High + Low / 3
    • Open + High + Low + Close / 4
    • High + Low + Close + Close / 4
    • Open, High, Low, Close

In this image i choosed lowest point of the candle.

Choosing an Anchor Point

Selecting / identifying the right anchor point is key to effectively leveraging the Anchored VWAP. This anchor point needs to align with your trading strategy and offer a significant reference point for analyzing price movements. Consider these criteria when choosing an anchor point:

– Peak or Trough Selection: A popular method involves selecting notable peaks or lows as the anchor point. This includes swing highs or lows, critical levels of support or resistance, or any point marking a significant shift in market dynamics.

– Temporal Milestones: Alternatively, anchoring can be based on specific chronological markers. For instance, the start of a trading week, month, quarter, or year can serve as a strategic point from which to calculate VWAP moving forward.

– Utilization of Pivot Points: Pivot points, integral to technical analysis, offer another anchoring strategy. Derived from the previous session’s high, low, and closing prices, these points help in forecasting potential zones of support and resistance.

– Event-Driven Anchoring: Choosing an anchor point around key events, such as economic data releases, earnings reports, or other market-moving occurrences, can be insightful. This approach aims to gauge the event’s market impact.

When determining an anchor point, ensure it aligns with your strategy and serves as a significant marker for evaluating market behavior. Adapting the anchor point to evolving market conditions is crucial to maintain its relevance to ongoing market activities.

I like to use the AVWAP indicator with even more AVWAP!

At this point, you must be wondering why I would use the same indicator twice, on the same chart, for the same instrument .

Use multiple AVWAP’s

You can use multiple AVWAP’s to gain a more comprehensive view of the security price movement. For example, a trader may anchor VWAP to different points in time, such as the high or low of the day, week, or month, to identify potential support or resistance levels. The trader can then use these levels to make more informed trading decisions. Multiple Anchored VWAPs can also be used to confirm each other, creating stronger signals.

Overall, Anchored VWAP is a versatile tool that can be used in a variety of trading strategies, depending on the trader’s goals and market conditions.

 

In the picture below see how I used two AVWAP’s for a countertrend trade, as the trend was down, and also for short trade at the AWVAP rejection

First trade was a counter trend trade . The entry was based on the oversold stochastic and the touch of the 2nd STD with a target at 1st STD and final target the Vwap

 

 

Next example  was a short at vwap with confirmation of a overbought stochastic with first target the 2nd Vwap anchored at the swing low and next target the 1st and 2nd STD of the second anchored.

 

Disclaimer: This trading strategy is for educational use only and not an investment advice. The practice involves risk and the possibility of financial loss. Investors should do their own research or consult a financial advisor. The publisher is not liable for investment outcomes. Remember, capital is at risk.

 

Use it as a potential support or resistance level

When the price of an asset is above the Anchored VWAP, it can act as a support level, and when the price is below the Anchored VWAP, it can act as a resistance level. This means that traders can use Anchored VWAP as a reference point for potential support and resistance levels. When the price of the stock approaches the Anchored VWAP, traders may look for a bounce or a breakout, depending on the direction of the trend.

Standard Deviation Bands

Use the STD (standard deviations bands)as point of measure volatility and potential price breakouts. These bands are plotted a certain number of standard deviations above and below the VWAP. The distance between the bands and the VWAP indicates market volatility – wider bands suggest higher volatility, while narrower bands indicate lower volatility.

The standard deviation bands can act as potential support and resistance levels. The upper band might act as resistance in an uptrend, while the lower band could serve as support in a downtrend.

With Ninja Trader Anchored VWAP  can Optimize Entry and Exit Points: by observing how prices interact with the VWAP and the bands, traders can find better points to enter or exit trades, aiming to improve their trading performance.

What types of trading styles can benefit from an Anchored VWAP strategy?

Algorithmic trading: Algorithmic traders can use the Anchored VWAP to determine their entry levels based on how the price is performing relative to the anchored VWAP.

  • Scalping: Scalpers can use the strategy to make quick trades based on small discrepancies placing multiple anchored vwap’s as points on chart
  • Day trading: Day traders can use daily AVWAP levels to determine if an asset is overbought or oversold for the trading day and make decisions about buying or selling based on that information.
  • Swing trading: Swing traders can use the anchored VWAP strategy to identify entry and exit points in the market based on how the stock is performing relative to the anchored VWAP when used as weekly or monthly VWAP.
  • Trend following: Traders who follow the trend can use anchored VWAP as an indicator of trend, if the stock is trading above the anchored VWAP it may indicate an uptrend and if it’s trading below it may indicate a downtrend.
  • Setting stop-loss and take-profit orders: Traders can use the Anchored VWAP STD bands to set stop-loss and take-profit orders to limit their potential losses and maximize their gains .

This tool is versatile and can be applied across different markets and timeframes, making it valuable for day traders, swing traders, and investors looking to gauge market sentiment and price dynamics around specific events or periods

To summarize:

  • Anchored VWAP is an upgraded version of the VWAP

  • AVWAP can be used for more than one trading session
  • AVWAP can be plot multiple times on same chart instrument

 

In conclusion, the Anchored VWAP (AVWAP) indicator stands as a pivotal tool for traders seeking to infuse precision and context into their market analysis. By allowing users to set a specific starting point for their calculations, the AVWAP offers a tailored approach to understanding price movements and market trends relative to significant events or chosen time frames. This customization makes it an indispensable asset for both short-term traders and long-term investors aiming to navigate the complexities of the market with greater insight and confidence. Whether for identifying potential support and resistance levels, optimizing entry and exit points, or enhancing overall trading strategies, the AVWAP provides a nuanced perspective that goes beyond the capabilities of traditional indicators. As markets evolve, so does the need for adaptive and sophisticated analysis tools, and the Anchored VWAP stands at the forefront of this evolution, offering clarity, precision, and a competitive edge to those who wield it wisely.

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