Anchored VWAP Trading Strategies and Mistakes to Avoid

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.

How to Choose an Anchor Point in the Anchored VWAP

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.

Who Developed the Anchored VWAP?

The Anchored VWAP was initially developed by Paul Levine, a physicist and technical analyst, as part of his work on the Market Interpretation/Data Analysis System (MIDAS) in the 1990s.

Levine’s work aimed to provide a more targeted analysis of price action by anchoring the VWAP to specific points.

This approach was later popularized by traders like Brian Shannon, who advocated for Anchored VWAP's utility in identifying key support and resistance levels.

Shannon, along with others in the trading community, has contributed to bringing Anchored VWAP into mainstream technical analysis.

Anchored VWAP vs. Moving Averages

Anchored VWAP and moving averages are both technical indicators but differ in their calculation, application, and insights.

First, an anchored VWAP is tied to a specific event or point in time chosen by the trader, such as a recent high, low, or a market event. However, moving averages calculate an average price over a fixed period (like 50 or 200 days) without any specific anchor.

Moreover, the anchored VWAP reflects market sentiment from this specific anchor point while moving averages offers a broader sense of trend direction.

Lastly, Anchored VWAP includes volume, making it responsive to key price levels with high trading activity.

On the other hand, moving averages are purely price-based, lacking volume sensitivity but offering clear trend signals.

How to Trade and Interpret the Anchored VWAP Indicator

Even though the anchored vwap is automatically calculated, it's important to understand its calculations to better interpret it.

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.

How to Identify Breakouts or Breakdowns using Anchored VWAP

Breakouts occur when the price moves above the Anchored VWAP after trading below it, signaling increased buying momentum and the potential start of an upward trend. 

Traders can confirm this move with volume spikes or complementary indicators like RSI before entering long positions. 

On the other hand, breakdowns happen when the price drops below the Anchored VWAP after being above it, indicating selling pressure and a likely downward trend. To minimize false signals, use additional confirmation such as candlestick patterns or trendline breaks.

How to Use the Anchored VWAP as Support or Resistance

The Anchored VWAP acts as a dynamic support or resistance level, depending on the price's position. When the price is above the Anchored VWAP, it often serves as a support level, where traders may look for buying opportunities during pullbacks. 

On the other hand, when the price is below the Anchored VWAP, it functions as resistance, with traders considering short positions if the price fails to break above the line. 

This approach provides a reliable framework for identifying key trade entry or exit points.

Anchored VWAP Indicator in Different Trading Strategies

The anchored VWAP indicator is helpful across multiple trading strategies.

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.

Multiple Anchored VWAPs for Enhanced Analysis

Applying multiple Anchored VWAPs at various points, such as recent highs, lows, or significant events, allows you to observe support and resistance levels across different time frames.

By anchoring the VWAP at several strategic points, like a weekly high and a monthly low, you can identify price zones with strong buying or selling volume. When these anchored VWAP lines converge near the same price level, it suggests a significant support or resistance area, where both short- and long-term market sentiment aligns.

This method provides a layered perspective on price action, making it easier for traders to spot key trends and adjust their strategies accordingly.

What's the VWAP Anchored Period? 

The VWAP Anchored Period refers to the starting point chosen to calculate the Anchored VWAP. This can be a specific event, date, or price level, such as a breakout, earnings report, or market high/low, allowing traders to analyze price trends from that point forward.

Where Is the Best Place to Anchor VWAP?

The best place to anchor VWAP is at significant events or levels, such as breakouts, breakdowns, major highs or lows, earnings reports, or volume spikes. These points provide meaningful insights into price trends and market sentiment.

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.

• 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.