Volume-weighted average price (VWAP) is a popular benchmark used by traders and investors to evaluate the performance of a particular security or portfolio. However, VWAP has its limitations, such as being sensitive to extreme market conditions and not reflecting the market’s current sentiment accurately. To overcome these limitations, traders use Anchored VWAP, which is a modification of VWAP that takes into account a specific period or anchor point.
In this article, we will explore the concept of Anchored VWAP, its significance in trading strategies, and how it can enhance the decision-making process for market participants.
What Is VWAP?
Let’s start by understanding what VWAP means before diving into the concept of Anchored VWAP. VWAP is a commonly used benchmark in financial markets. It provides traders and investors with a measure of the average price at which a security has traded throughout a given trading session, taking into account the volume of shares or contracts traded at each price level.
Unlike simple average price calculations, which treat all trades equally, VWAP places more significance on trades with higher volumes. This weighting ensures that the VWAP reflects the true average price paid by market participants, as it considers the influence of larger trades more heavily.
VWAP is often used as a reference point for assessing the effectiveness of a trade execution. Traders aim to execute their orders at prices that are better than or close to the VWAP, indicating that they have achieved favorable prices relative to the average market prices during the trading session.
Furthermore, VWAP is employed as a tool for analyzing market trends and making trading decisions. By comparing the current price of a security to its VWAP, traders can identify whether the price is trading above or below average levels, potentially signaling overbought or oversold conditions.
What Is Anchored VWAP?
Anchored VWAP, or AVWAP, is a modification of the traditional VWAP that incorporates a specific reference point or anchor point in its calculation. While the standard VWAP calculates the average price from the start of the current trading session, which can be somewhat arbitrary, Anchored VWAP focuses on a specific period or event and calculates the average price based on trades occurring from that point onward.
The anchor point in Anchored VWAP can be chosen based on various factors, such as a specific time of day, the release of an important news announcement, the initiation of a trend, or any other significant event. By anchoring the VWAP to a specific point, traders can gain a more precise understanding of the average price movement and volume dynamics from that specific reference point onwards.
Anchored VWAP can provide valuable insights into how a security is performing relative to a specific event or market condition. It helps traders evaluate the impact of significant events on price movement and assess whether subsequent trading activity is aligned with or deviates from the anchored reference point.
Traders often use Anchored VWAP to identify key support and resistance levels, track the effectiveness of their trading strategies, and make more informed decisions based on the behavior of price and volume in relation to the selected anchor point.
Manual vs. Automatic Anchoring
When it comes to anchoring options for Anchored VWAP, there are various approaches available to traders. In TrendSpider, these anchoring options can be broadly classified into manual anchoring and automatic anchoring.
- Manual Anchoring: Manual anchoring involves selecting a specific candle to anchor the VWAP. Traders can manually choose a candle that represents a significant event or the beginning of a specific time period. Manual anchoring allows for a more customized analysis.
- Automatic Anchoring: Automatic anchoring involves using predefined technical levels or time frames to anchor the VWAP. Here are some examples:
- Technical Level Anchoring: Traders can anchor the VWAP to technical levels such as the highest high, lowest low, highest volume, recent gap, or Blue Raindrop. These levels provide a reference point that can help identify support and resistance areas and gauge market sentiment.
- Time Frame Anchoring: Traders can anchor the VWAP to different time frames such as day to date, week to date, month to date, quarter to date, or year to date. This allows for a broader analysis of price action and volume dynamics within a specified time period.
Turning the typically cumulative Anchored VWAP into a rolling indicator can be accomplished using specific tools or platforms such as TrendSpider. In TrendSpider, when anchoring from a recent gap, Blue Raindrop, or time frame, you can check the “Continuous?” box. This setting ensures that the Anchored VWAP is reset and updated when new technical levels or time frames occur, creating a rolling indicator. This enables traders to stay up-to-date with the latest developments and make more dynamic trading decisions based on the changing VWAP values.
By leveraging both manual and automatic anchoring options, traders can gain valuable insights into price action, volume dynamics, and market sentiment, empowering them to make more informed trading decisions and improve their overall performance.
Example Manual Anchor Points
There are various manual anchor points that traders can use for calculating Anchored VWAP, depending on their trading strategies and objectives. Here are some examples of anchor points that traders may consider:
- Intraday High/Low: Anchoring the VWAP to the intraday high or low can provide insights into price behavior and volume distribution from those extreme points. It helps traders understand how price and volume interact around these key levels and assess the significance of potential reversals or breakouts.
- Key Technical Levels: Anchoring the VWAP to significant technical levels, such as support or resistance levels, can offer valuable insights into the behavior of price and volume around these levels. It helps traders gauge the strength of support or resistance and assess the market sentiment in relation to those levels.
- Trend Reversal Points: Anchoring the VWAP to the point of a potential trend reversal can be useful in assessing the strength and sustainability of the reversal. By focusing on the VWAP from the reversal point, traders can observe how price and volume interact with the Anchored VWAP and make informed decisions about the potential continuation or termination of the new trend.
- News Event Release: Anchoring the VWAP to the time of a specific news event release can help traders analyze the impact of the news on price action and volume patterns. It allows for a focused assessment of how the market reacts to the news event and provides context for subsequent trading decisions.
- Intraday Time Frames: Anchoring the VWAP to specific intraday time frames, such as after the market opens or during specific trading hours, allows traders to focus on price and volume dynamics during those periods. This can help identify intraday trends, volume surges, or periods of consolidation, providing valuable information for short-term trading strategies.
These are just a few examples of manual anchor points commonly used in Anchored VWAP calculations. Traders have the flexibility to choose the most relevant anchor point based on their analysis objectives and the specific market dynamics they wish to evaluate.
For more information about choosing an anchor point and the Anchored VWAP in general, visit AlphaTrends.net. AlphaTrends founder, Brian Shannon, considers the Anchored VWAP the most valuable tool that has improved his trading. His website provides a great deal of information and resources on how to best use the Anchored VWAP as well other trading topics.
Pros and Cons of Anchored VWAP
Here are some potential advantages and limitations of using Anchored VWAP:
- Enhanced accuracy: Anchored VWAP provides a more accurate representation of the average price paid for a security over a specific time period. This makes it a reliable indicator for assessing the fair value of a security.
- Long-term analysis: Anchored VWAP can be customized to start from any specific point in time, allowing traders and investors to analyze price movements and volume trends over extended periods. This makes it particularly useful for long-term analysis and identifying long-lasting trends.
- Reference point for decision-making: Anchored VWAP serves as a reference point against which traders can compare the current price of a security. It helps identify whether the current price is overvalued or undervalued, assisting in making informed trading decisions.
- Confirmation of support and resistance levels: Anchored VWAP can act as a confirmation tool for identifying significant support and resistance levels. When the current price of a security intersects with the Anchored VWAP, it can indicate potential price reversals or continuation of trends.
- Subjectivity in anchoring points: The selection of the anchor point for calculating the VWAP is subjective and can vary among traders. Different anchor points can yield different results and interpretations, leading to potential discrepancies in analysis and decision-making.
- Lagging indicator: Like other moving averages, Anchored VWAP is a lagging indicator. It is based on historical data and may not provide real-time insights into current market conditions. Traders relying solely on Anchored VWAP may miss out on immediate price movements and trends.
- Insensitivity to recent data: As Anchored VWAP considers the entire historical period from the chosen anchor point, it may not fully reflect recent market developments or changes in sentiment. Traders seeking more responsive indicators may prefer other tools that emphasize recent data.
- Vulnerability to market manipulation: In markets with low liquidity or susceptible to manipulation, the accuracy of Anchored VWAP can be compromised. Unusual trading activities or large-volume trades can distort the VWAP calculation, leading to potentially misleading results.
It’s important for traders and investors to understand both the advantages and limitations of Anchored VWAP to effectively incorporate it into their trading strategies and decision-making processes.
Example scanners and strategies that use VWAP
The Bottom Line
In conclusion, Anchored VWAP is a powerful tool that provides traders and investors with valuable insights into the average price at which a security has traded over a specified period. By anchoring the VWAP to a specific point in time, such as a significant event, traders can gain a deeper understanding of market dynamics and make more informed decisions. This technique allows for a comprehensive analysis of price action, volume, and market sentiment, enabling traders to identify key support and resistance levels and spot potential buying or selling opportunities.