Anchored VWAP Trading Strategies and Mistakes to Avoid

Anchored VWAP (AVWAP) is an indicator used in technical analysis to calculate the average price of a traded security, weighted by volume, from a chosen starting point.

It gives traders the flexibility to analyze price action from a particular event or time frame. This article explains the anchored VWAP indicator in detail and offers tips and mistakes to avoid.

Key Takeaways

• Anchored VWAP allows for customized analysis starting from significant market events.

• It helps confirm bullish and bearish trends, aiding in better decision-making.

• The indicator identifies key support and resistance levels for strategic entry and exit points.

• Anchored VWAP is adaptable for both day trading and swing trading strategies.

What Is Anchored VWAP?

Anchored VWAP, short for anchored Volume-Weighted Average Price, is a technical analysis indicator that shows the average price a security has traded at, weighted by volume, starting from a specific chosen point.

Unlike the traditional VWAP, which resets at the beginning of each trading session, anchored VWAP allows traders to select a significant event or time, known as the "anchor point," to begin the calculation.

Choosing an Anchor Point

Choosing an anchor point when using the AVWAP is very important during analysis.

Here are some tips on how to choose an anchor point:

• Significant Events: Choose points where major news or earnings reports were released. These events often lead to significant price movements and can serve as effective anchor points.

• Breakouts and Breakdowns: Anchor to points where the price breaks out of a consolidation pattern or breaks down from support. These points often indicate the start of a new trend.

• Highs and Lows: Use significant highs or lows in the price chart. These points can help you see how the price has moved relative to major turning points.

• Volume Spikes: Anchor to points where there was a significant spike in trading volume. High volume often signifies strong interest and can mark important price levels.

Anchored VWAP Formula

The anchored VWAP calculation is based on the traditional VWAP formula but from a specific point.

Interpreting the Anchored VWAP

Interpreting the anchored VWAP is straightforward. Here’s how to make sense of the anchored VWAP line on your charts:

• Price above anchored VWAP => indicates a bullish trend. This suggests that buyers are willing to pay higher prices, and there is upward momentum.

• Price below anchored VWAP => indicates a bearish trend. This implies that sellers are dominating, and there is downward pressure on the price.

• Support level => In a bullish trend, the price might bounce off the anchored VWAP, using it as support.

• Resistance level => In a bearish trend, the price might struggle to rise above the anchored VWAP, using it as resistance.

• Trend Confirmation => If the price consistently stays above the anchored VWAP after an upward move, it confirms the strength of the bullish trend.
  If the price remains below the anchored VWAP after a downward move, it confirms the strength of the bearish trend.

• Reversal Signals => Watch for the price crossing the anchored VWAP from below to above as a potential bullish reversal signal, and from above to below as a potential bearish reversal signal.

Trading with the Anchored VWAP Indicator

Having understood the anchored VWAP indicator and its significance, let’s explore how to incorporate it into trading strategies.

How to Apply AVWAP to Your Chart

To apply the anchored VWAP to your chart, follow these steps:

1. Select the significant event or point you want to anchor to.

2. Add the anchored VWAP indicator to your charting software.

3. Set the anchor point on the chosen event.

4. Observe how the price interacts with the anchored VWAP line for insights

Anchored VWAP Trading Strategy

Developing an anchored VWAP trading strategy involves understanding the market context and how price interacts with the indicator.

As mentioned earlier, the anchored VWAP can serve as both support and resistance levels and can also signal trend reversals and confirmations.

Here’s how you can build a trading strategy around these concepts.

1. Identify and set your anchor point, as explained above.

2. Analyze the price action via the anchored VWAP to understand whether there’s a bullish or bearish trend.

3. Identify entry points based on the market trend.

4. Set stop-losses and profit targets to limit your losses and maximize your profits.

5. Monitor the trade and exit it when you reach your profit target.

How to Identify Entry Points using anchored VWAP

Your entry points depend on the market trend:

Bullish Entry:

• Condition: The price crosses above the anchored VWAP from below.

• Action: Enter a long position (buy).

Bearish Entry:

• Condition: The price crosses below the anchored VWAP from above.

• Action: Enter a short position (sell).

In both cases, confirm with other technical indicators, such as moving averages and RSI.

How to Set Stop Losses using the Anchored VWAP

Similarly, your stop losses also vary depending on the existing market trend.

For Bullish Trades

• Initial Stop Loss: Set your stop loss just below the anchored VWAP line to limit potential losses if the price reverses.
• Trailing Stop Loss: As the price moves in your favor, adjust your stop loss to just below higher lows, securing profits while allowing for upward movement.

For Bearish Trades

• Initial Stop Loss: Place your stop loss just above the anchored VWAP line to protect against sudden upward price reversals.
• Trailing Stop Loss: Move your stop loss to just above lower highs as the price falls, ensuring you lock in profits while accommodating continued downward movement.

How to Set Profit Targets with the Anchored VWAP

To set a profit target with the anchored VWAP, look for previous support (for bearish trades) or resistance (for bullish trades) levels on the chart as potential profit targets.

Moreover, determine your profit targets based on a favorable risk-reward ratio, such as 2:1 or 3:1, to ensure that your potential reward justifies the risk taken.

Also, consider using multiple profit targets to lock in profits at different levels.

• First Target: Identify the nearest significant support or resistance level and set your first profit target there.

• Second Target: Set a more ambitious target based on further support or resistance levels, allowing for extended price movement in your favor.

• Adjust Based on Market Conditions: Be flexible with your profit targets, adjusting them based on changing market conditions and price action.

Anchored VWAP in Day Trading

The anchored VWAP is a valuable tool for day traders looking to make informed decisions within a single trading session.

By anchoring the VWAP to the start of the trading day or to significant intra-day events, traders can better understand the day’s trend.

For instance, if the price of a stock crosses above the anchored VWAP early in the session, it indicates bullish sentiment and potential buying opportunities.

Day traders often use the anchored VWAP to identify short-term support and resistance levels, which can help set entry and exit points.

The ability to anchor to specific points within the day makes the anchored VWAP a flexible and dynamic tool, helping traders adapt quickly to market movements and make more precise trades.

Anchored VWAP for Swing Trading

Swing traders, who typically hold positions for several days to weeks, can also benefit significantly from using the anchored VWAP.

Swing traders can analyze price trends and market sentiment over longer periods by anchoring the VWAP to significant events such as earnings reports, major news releases, or pivotal price breakouts.

Using the anchored VWAP in swing trading enables traders to make more informed decisions based on significant market events, enhancing their ability to capture larger price movements over extended periods.

Benefits of Anchored VWAP

If you’re considering whether or not to use anchored VWAP, here are some of its benefits:

• Provides a clear picture of the average price weighted by volume from a specific starting point.

• Helps identify key support and resistance levels, aiding in setting entry and exit points.

• Allows you to anchor to significant market events, providing relevant insights.

• Assists in confirming trends and potential reversals, making spot bullish or bearish shifts easier.

• Useful in both day trading and swing trading strategies.

• Improves overall trading performance by offering a tailored perspective on price trends and market sentiment.

Common Mistakes to Avoid with the Anchored VWAP

However, here are some common mistakes to avoid when using the anchored VWAP:

• Choosing insignificant or random anchor points can lead to misleading analysis.

• Relying solely on the anchored VWAP without considering other indicators or market conditions.

• Adding too many indicators can lead to analysis paralysis and confusion.

• Not adapting the anchored VWAP for different time frames and market conditions can limit its effectiveness.

• Failing to consider volume when interpreting the anchored VWAP can result in inaccurate assessments.

Conclusion

Understanding and utilizing the anchored VWAP indicator can significantly enhance your trading strategies by providing tailored insights into market trends and price action.

Therefore, consider using it while trading, but make sure you avoid the common mistakes mentioned above. Doing so can improve your overall trading performance and make more informed decisions.

Join XS for more helpful tips on your trading journey.

FAQs

What Is the Anchored VWAP?

Anchored VWAP is a technical analysis indicator that shows the average price a security has traded at, weighted by volume, from a specific starting point the trader chooses.

Is Anchored VWAP better than VWAP?

Anchored VWAP is often better for specific contexts because it allows traders to set a custom anchor point, providing more relevant insights into price trends and market sentiment.

What Is Anchored Volume?

Anchored volume is the volume of trades that have occurred since the chosen anchor point, helping to gauge the strength and significance of price movements.

What Is the Formula for Anchored VWAP?

The formula for anchored VWAP is the same as the VWAP’s but from the selected anchor point onward: