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Anchored VWAP Anchored Accumulation/Distribution
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Anchored Volume-by-Price

In the world of financial markets, understanding the volume profile of a security is crucial for informed decision-making. Volume-by-Price (VbP) analysis has long been a popular tool for traders and investors, providing insights into the distribution of trading volume at different price levels. However, an enhancement to this technique has emerged, known as Anchored Volume-by-Price (AVbP), which offers an even more refined perspective on market dynamics. In this article, we explore the concept of AVbP and its potential benefits for market participants.

What Is Volume-by-Price?

Before delving into Anchored Volume-by-Price, let’s first familiarize ourselves with the concept of Volume-by-Price. Volume-by-Price is a popular analytical tool used in financial markets to visualize the distribution of trading volume at different price levels within a given timeframe. It provides valuable insights into the supply and demand dynamics of a security, allowing traders and investors to identify significant price levels and potential areas of support and resistance.

By plotting volume as a vertical histogram along the price axis, Volume-by-Price creates a graphical representation of how much trading activity has occurred at each price level. The width of each bar in the histogram corresponds to the volume traded at that particular price, while the height of the bar represents the range of prices where the volume has been accumulated.

The resulting volume profile generated by Volume-by-Price offers a clear visualization of where the majority of trading volume has taken place and helps identify areas of high liquidity and potential price reversals. Traders often use this information to gauge the strength of price levels, confirm breakouts or breakdowns, and anticipate market reactions.

While Volume-by-Price has proven to be a valuable tool, its enhancement through Anchored Volume-by-Price takes this analysis to a more granular level, providing additional insights and increasing the precision of interpreting volume-based market dynamics.

What Is Anchored Volume-by-Price?

Anchored Volume-by-Price is an improvement that addresses some of the limitations of traditional Volume-by-Price analysis. While VbP is a powerful tool for visualizing volume distribution at different price levels, it is often based on the Volume Profile for Visible Range (VPVR), which means it considers only the range currently visible on the screen. This limitation necessitates precise zooming and can make accurate analysis challenging, particularly when studying specific periods of interest.

AVbP overcomes these limitations by introducing the ability to anchor the volume profile to specific reference points or events. This anchoring can be done manually in TrendSpider, by selecting a particular candle, or automatically, by using predefined technical levels or time-based ranges.

Manual anchoring allows traders to focus on a specific candle they deem significant. By anchoring the volume profile to that point, they can precisely analyze volume distribution within a targeted range, irrespective of the visible range on the screen. This manual anchoring feature enhances the precision and flexibility of VbP analysis, enabling traders to study specific periods of interest in greater detail.

Automatic anchoring in AVbP offers additional convenience by providing predefined technical levels or time-based ranges for anchoring. Technical levels such as the highest high, lowest low, highest volume, recent gap, or Blue Raindrop can be used as reference points to anchor the volume profile. Time-based ranges, such as day-to-date, week-to-date, month-to-date, quarter-to-date, or year-to-date, provide a time-based context for analyzing volume distribution.

By incorporating manual and automatic anchoring features, AVbP allows traders to overcome the limitations of VbP based on the visible range. They can analyze volume profiles with precision and focus on specific periods of interest. This enhanced capability provides traders with a more accurate understanding of volume-based market dynamics and aids in identifying significant support and resistance levels, price imbalances, and areas of high trading activity.

Volume by Price

Using Anchored VbP With Anchored VWAP

Using Anchored Volume-by-Price in conjunction with Anchored Volume-Weighted Average Price (AVWAP) can provide traders with a comprehensive analysis of market dynamics, combining volume and price information at specific reference points or time ranges.

Anchored Volume-Weighted Average Price represents the average price at which an instrument has traded, weighted by volume, within a specific time range. Anchoring the VWAP allows traders to assess the average price levels and their significance at different reference points.

When used together, AVbP and AVWAP offer several benefits:

  1. Confirmation of key levels: Traders can compare the anchored volume profile with the AVWAP to validate key support and resistance levels. If the volume profile exhibits significant activity around a particular price level or time range, and the anchored VWAP aligns with that level, it reinforces the importance of that level as a potential area of interest.
  2. Confluence of volume and VWAP: Combining AVbP with AVWAP enables traders to identify confluence zones where high volume coincides with the average price. These confluence zones often indicate areas of increased liquidity and potential turning points in the market, providing valuable insights for trading decisions.
  3. Trend assessment: Analyzing the relationship between the anchored volume profile and the AVWAP over time helps traders assess the strength and direction of the trend. Consistent alignment or divergences between the volume profile and VWAP can provide clues about the underlying market sentiment and potential trend reversals.
  4. Dynamic reference points: By anchoring both VbP and VWAP to specific reference points or time ranges, traders can identify dynamic support and resistance levels. This allows them to analyze how volume and average price interact at different stages of the market, providing a more nuanced understanding of market dynamics.

By integrating AVbP with AVWAP, traders can gain deeper insights into the interplay between volume and price, facilitating more informed trading decisions. However, it is important to carefully select and validate the reference points or time ranges used for anchoring, considering individual trading strategies and market conditions.

Pros and Cons of Anchored Volume-by-Price

Here are some potential pros and cons of using the Anchored Volume-by-Price:

Pros:

  1. Enhanced precision: AVbP allows traders and investors to focus on periods of interest, providing a more precise analysis of volume distribution within those areas. This increased granularity can lead to more accurate insights and better-informed trading decisions.
  2. Contextual analysis: AVbP offers the ability to anchor volume profiles to reference points or events, such as technical levels or time-based ranges. This contextual analysis helps traders understand volume dynamics within a specific context, providing valuable insights into market behavior and potential support and resistance levels.
  3. Flexibility: AVbP provides both manual and automatic anchoring options, giving traders the flexibility to choose the anchoring method that suits their needs. Whether it’s selecting a specific candle or price level manually or using predefined technical levels or time-based ranges, traders can adapt the analysis to their preferred approach.
  4. Identification of significant levels: AVbP assists in identifying significant price levels where high trading activity has occurred. Traders can pinpoint areas of accumulation or distribution, potentially revealing key support or resistance levels that can influence future price movements.
  5. Multiple anchoring capability: AVbP allows traders to anchor multiple times and view multiple volume profiles simultaneously. This feature enables the analysis and comparison of different volume distributions at various reference points or time ranges, providing a comprehensive view of market volume dynamics.

Cons:

  1. Complexity: AVbP introduces an additional layer of complexity compared to traditional Volume-by-Price analysis. Traders need to understand the concept of anchoring, select appropriate reference points, and interpret the volume profiles accurately. This complexity may require a learning curve and a deeper understanding of market dynamics.
  2. Subjectivity: The selection of reference points or events for anchoring is subjective and relies on the trader’s judgment. Different traders may anchor the volume profile differently, potentially leading to variations in interpretations and analysis outcomes.
  3. Data availability: AVbP heavily relies on historical data availability. If historical data is limited or not readily accessible, it may hinder the effectiveness of AVbP analysis, especially when anchoring to specific time-based ranges.
  4. Potential overfitting: Traders need to be cautious about overfitting their analysis by selectively anchoring volume profiles to support preconceived biases. Overfitting can lead to distorted interpretations and poor trading decisions, emphasizing the importance of objective analysis and sound risk management practices.

While AVbP offers significant advantages in volume analysis, traders should be aware of its limitations and exercise prudent judgment in its application. By leveraging its strengths while being mindful of potential drawbacks, traders can utilize AVbP effectively as a powerful tool for market analysis and decision-making.

Example scanner based on Anchored Volume-by-Price

Anchored Volume-by-Price can be used in Scanning the market. To see how exactly it can be used in this way, we provide the following sample. The scanner searches the market for stocks using this indicator.

"Consolidate Around Volume Shelf #anchored" scanner by TrendSpider
charts.trendspider.com
“Consolidate Around Volume Shelf #anchored” scanner by TrendSpider

The Bottom Line

In conclusion, incorporating Anchored Volume-by-Price into trading analysis provides traders with valuable insights into volume distribution within specific time ranges. AVbP allows for a focused examination of market activity and supports the identification of key support and resistance levels. By leveraging AVbP, traders can gain a deeper understanding of market dynamics and make more informed trading decisions.

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Anchored VWAP Anchored Accumulation/Distribution