Anchored VWAP (Volume Weighted Average Price) is a technical analysis tool that calculates the average price of a security, weighted by volume, starting from a specific point in time chosen by the trader. Unlike the standard VWAP, which resets daily, Anchored VWAP allows traders to select any significant event, such as a breakout, earnings release, or trend reversal, as the starting point. This flexibility makes it a powerful tool for identifying support and resistance levels and gauging market sentiment.

Understanding Anchored VWAP

The Anchored VWAP provides a dynamic view of how much market participants have paid, on average, for a security since the chosen starting point. It helps traders and investors assess whether the price is overvalued or undervalued relative to its volume-weighted average.

Formula for VWAP:
VWAP = (Cumulative Price × Volume) / Cumulative Volume
The anchored version starts the calculation from a specific date or time rather than the start of a trading session.

For example:

• A trader anchors the VWAP to a breakout on January 1.
• The Anchored VWAP from that date shows the average price paid by participants since the breakout, accounting for volume.

Why Use Anchored VWAP?

• Customisation: Focuses on specific events or periods, making it more flexible than standard VWAP.
• Support and Resistance: Identifies dynamic levels where price action may find support or resistance.
• Market Sentiment: Helps determine whether buyers or sellers are in control relative to a key event.
• Trend Confirmation: Confirms the strength and sustainability of a trend.

Key Applications of Anchored VWAP

1. Trend Analysis: Tracks whether the price is trading above or below the anchored VWAP to confirm bullish or bearish trends.
2. Event Anchoring: Pinpoints significant moments like earnings releases, major news, or breakouts as starting points for the calculation.
3. Dynamic Support/Resistance: Acts as a moving average that adjusts based on price and volume, providing actionable levels.
4. Trade Entries and Exits: Guides traders on potential buying or selling opportunities based on proximity to the anchored VWAP.

Common Challenges Related to Anchored VWAP

• Subjectivity: The choice of the anchoring point can vary between traders, potentially leading to inconsistent results.
• Not Predictive: Anchored VWAP reflects past price and volume data; it does not predict future price movements.
• Complexity: Requires experience to interpret correctly, especially when combined with other indicators.
• High Volatility: During volatile periods, the anchored VWAP may fluctuate significantly, reducing reliability.

Step-by-Step Guide to Using Anchored VWAP

1. Choose the Anchor Point: Select a significant date or event, such as a breakout, earnings announcement, or market reversal.
2. Apply the Indicator: Use charting software to calculate the Anchored VWAP from the chosen point. Most platforms have a built-in tool for this.
3. Interpret the Levels:
   • If the price is above the Anchored VWAP, it indicates bullish sentiment.
   • If the price is below, it suggests bearish sentiment.
4. Combine with Other Tools: Use Anchored VWAP alongside indicators like RSI, MACD, or moving averages to confirm signals.
5. Adjust as Needed: Re-anchor the VWAP to new events or periods if market conditions change significantly.

Practical and Actionable Advice

• Focus on Key Events: Anchor the VWAP to moments of high market impact, such as breakouts, gaps, or trend reversals.
• Watch for Confluence: Combine Anchored VWAP with other support/resistance levels or indicators for stronger signals.
• Use for Position Sizing: Use Anchored VWAP as a guide for scaling into or out of trades.
• Backtest Your Strategy: Test the effectiveness of your anchoring points on historical data before trading live.
• Avoid Overcomplication: Keep your analysis simple and focus on clear setups where Anchored VWAP aligns with other indicators.

FAQs

What is Anchored VWAP?
Anchored VWAP is a volume-weighted average price calculated from a specific starting point, chosen by the trader, instead of resetting daily.

How does Anchored VWAP differ from VWAP?
While VWAP resets daily, Anchored VWAP starts from a specific date or event, making it more flexible for long-term analysis.

Why use Anchored VWAP?
It provides customised insights into support, resistance, and market sentiment based on significant events or periods.

What events should I anchor VWAP to?
Key events like breakouts, earnings announcements, or significant price reversals are ideal anchor points.

Is Anchored VWAP a leading or lagging indicator?
It is a lagging indicator, as it is based on past price and volume data.

Can I use Anchored VWAP for all asset classes?
Yes, Anchored VWAP can be applied to stocks, forex, commodities, and cryptocurrencies.

What timeframe works best for Anchored VWAP?
It can be used across various timeframes, but the choice depends on your trading style (e.g., intraday vs. long-term).

Does Anchored VWAP work in volatile markets?
While useful, Anchored VWAP may be less reliable during extreme volatility, so it’s best combined with other indicators.

Can I re-anchor VWAP during a trade?
Yes, re-anchoring can provide updated insights if new significant events occur.

What platforms offer Anchored VWAP?
Popular charting platforms like TradingView, ThinkorSwim, and MetaTrader offer Anchored VWAP tools.

Conclusion

Anchored VWAP is a versatile and flexible tool for traders looking to analyse price and volume dynamics from specific points in time. By identifying support and resistance levels and confirming trends, it helps traders make more informed decisions. While it requires practice and proper anchoring, combining Anchored VWAP with other indicators can significantly enhance trading strategies.