Anchored VWAP Trading Strategy – A Beginner’s Guide

What’s Anchored AVWAP?

The Anchored VWAP (Volume-Weighted Average Price) is a technical analysis tool used to identify potential entry and exit points in the market. Unlike the traditional VWAP, which considers the entire trading day, the Anchored VWAP takes this concept a step further by allowing you to set a specific starting point, like the opening price, a breakout level, or a significant high/low. From that point onwards, the VWAP will calculate the average price considering both volume and price fluctuations.

Key Differences Between Traditional VWAP and Anchored VWAP

Trading with Anchored VWAP

1. Choose your asset and timeframe: Select the stock, forex pair, or cryptocurrency you want to trade and decide on your trading horizon (e.g., daily, hourly).

2. Set your anchor point: Identify a significant price level on the chart that you believe will be a turning point. This could be the opening price, a breakout point after a period of consolidation, or a major high/low.

3. Calculate the Anchored VWAP: Most charting platforms have built-in Anchored VWAP indicators. If yours doesn’t, you can calculate it manually by considering the average price and volume since your chosen anchor point.

   • Price crossing the Anchored VWAP:

     • Buy Signal: If the price decisively breaks above the Anchored VWAP and sustains the level, it might indicate a potential buying opportunity. This suggests strong buying pressure pushing the price higher than the average price weighted by volume.
     • Sell Signal: Conversely, if the price breaks below the Anchored VWAP and holds the level, it might indicate a potential selling opportunity, suggesting selling pressure overpowering the buyers.

   • Deviations from the Anchored VWAP:

     • Buy Signal: If the price dips significantly below the Anchored VWAP but quickly recovers and starts trending upwards, it might be a buying opportunity. This can signal a temporary pullback before the uptrend resumes.
     • Sell Signal: If the price spikes significantly above the Anchored VWAP but then falls back and starts trending downwards, it might be a selling opportunity. This can signal a potential reversal after an overbought condition.

       Identify trading signals:

4. Exit Points:

   • Profit Target: Set a realistic profit target based on your risk tolerance and market conditions. Aim to exit when the price reaches your target or encounters resistance.
   • Stop-Loss: Always place a stop-loss order to limit potential losses. You can set your stop-loss below the Anchored VWAP for long positions and above it for short positions.

5. Trade Management:

   • Position Sizing: Only risk a small percentage of your capital per trade. This helps manage risk and allows you to stay in the game even during losing streaks.
   • Always place stop-loss orders below your entry price for long positions and above your entry price for short positions. This limits potential losses if the trade moves against you.
   • Trailing Stop-Loss: Consider using a trailing stop-loss to lock in profits as the price moves in your favor. Gradually increase your stop-loss as the price moves towards your target.

Practical Example

Let’s say you set the anchor point at the opening price of a stock. As the day progresses, the Anchored VWAP line will adjust based on volume and price movements.

• Scenario 1: Buy Signal

  The price dips below the Anchored VWAP but quickly recovers and starts trending upwards. This could be a potential buying opportunity as the price might be undervalued based on the average price considering volume.

• Scenario 2: Sell Signal

  The price spikes above the Anchored VWAP but then falls back and starts trending downwards. This could be a potential selling opportunity as the price might be overbought compared to the average price weighted by volume.

Additional Considerations

This table explores how Anchored VWAP can reflect the psychology behind price movements. It highlights specific Anchored VWAP signals and the potential thought processes of traders behind those actions. By understanding these behavioral patterns, traders get valuable insights for identifying high-probability trades based on Anchored VWAP signals.

• Support and Resistance: Look for traditional support and resistance levels to confirm your trading signals based on the Anchored VWAP.
• Volatility: High volatility can create choppy price action, making anchored VWAP signals less reliable. Consider using the strategy during calmer market conditions.
• Confirmation: Don’t rely solely on the Anchored VWAP. Use other technical indicators or chart patterns to confirm your entry and exit points.
• Risk Management: Always set stop-loss orders to limit potential losses and manage your risk per trade.

Tutorial – Step by Step

Let’s imagine you’re looking to trade stock XYZ using a daily timeframe and the Anchored VWAP strategy.

1. Identify the anchor point: You notice XYZ stock breaks out of a consolidation zone at $20. You set this breakout price as your anchor point.
2. Monitor the Anchored VWAP: The Anchored VWAP starts to rise along with the price of XYZ, indicating buying pressure.
3. Look for a buy signal: If the price continues to rise above the Anchored VWAP with increasing volume, this could be a potential buy signal.
4. Confirm and enter: You might consider additional confirmation from other indicators before entering a long position.
5. Set stop-loss and take-profit: Place a stop-loss order below the Anchored VWAP to limit potential losses and a take-profit order at your desired profit target.
6. Monitor and adjust: Continuously monitor the price action and the Anchored VWAP. If the price falls below the Anchored VWAP and bearish momentum builds, consider exiting your long position to avoid further losses.

Market Conditions and Anchored VWAP

Anchored VWAP is a valuable tool, but its effectiveness can be influenced by different market conditions. Here’s how to adapt your strategy based on the market environment:

Using Anchored VWAP in Trending Markets:

• Trending Markets: In strong uptrends or downtrends, Anchored VWAP shines.
  • Long Entries: Look for dips below the Anchored VWAP as potential buying opportunities, especially with high volume. This suggests a temporary pullback within the uptrend.
  • Short Entries: Conversely, in downtrends, identify spikes above the Anchored VWAP with high volume as potential shorting points, indicating a continuation of the downward trend.

Adapting Anchored VWAP Strategies for Range-Bound Markets:

• Range-Bound Markets: When the price remains relatively flat within a defined support and resistance zone, Anchored VWAP can be less clear-cut.
  • Focus on Price Action: Look for price rejections at the support or resistance levels in conjunction with the Anchored VWAP for confirmation.
  • Consider Other Indicators: Explore incorporating volatility indicators to gauge potential breakouts from the range.

Identifying Volatile Market Conditions and Adjusting Anchored VWAP Parameters:

• Volatile Markets: During periods of high volatility, the Anchored VWAP can become more erratic due to sudden price swings.
  • Shorten Calculation Period: Consider using a shorter timeframe for the VWAP calculation to capture more recent price movements.
  • Increase Volume Threshold: You might also raise the volume threshold to filter out noise and focus on high-volume confirmation signals.

The Impact of News Events:

• News Events: Significant news announcements can cause price gaps and disrupt typical trading patterns.
  • Wait for Market Reaction: Avoid using Anchored VWAP immediately after news events. Allow the market to settle and establish a new direction before acting.
  • Focus on Confirmation: Once the market reacts, use Anchored VWAP in conjunction with price action to confirm entry or exit signals.

Using Anchored VWAP During Market Openings and Closings:

• Market Openings: The opening price can be a natural anchor point but be cautious.

  • Observe Opening: The first few minutes after the open can be volatile. Let the price establish a direction before using the Anchored VWAP.
  • Consider Alternative Anchors: If the opening is unclear, use a different anchor point like a breakout level or a significant high/low within the opening hour.

• Market Closings: Similar to openings, be mindful of potential gaps or imbalances near the close.

  • Avoid Late Entries: It’s generally safer to avoid using Anchored VWAP for entries very close to the closing bell.
  • Focus on Intraday Swings: Anchored VWAP can be more effective for identifying intraday swings throughout the trading session.

Advanced Anchored VWAP Techniques:

Here, we delve into some advanced techniques that can further enhance your Anchored VWAP strategy:

1. Double Anchored VWAP: Combining Two Anchor Points

This strategy goes beyond the typical single anchor point. You can set two anchor points to create a “zone” for potential entries and exits. Here’s how it works:

• Identify two significant price levels, such as a breakout point and a prior swing high/low.
• Calculate the VWAP from each anchor point separately.
• The area between the two Anchored VWAP lines creates a “zone of value.”
• Long Entry: Look for buying opportunities when the price dips below both Anchored VWAPs, potentially indicating a buying zone with strong support.
• Short Entry: Conversely, consider shorting if the price rallies above both Anchored VWAPs, suggesting a potential resistance zone and a possible reversal.

2. Using Anchored VWAP with Renko Charts for Identifying Trend Changes

Renko charts focus on price movements rather than time intervals. By combining Anchored VWAP with Renko charts, you can:

• Identify trend changes with more precision.
• Use the Anchored VWAP to gauge the strength of a trend based on volume within the Renko bar.
• Long Entry: In an uptrend on the Renko chart, look for the price on a regular candlestick chart to dip below the Anchored VWAP within a Renko bar. This might signal a potential buying opportunity within the uptrend.
• Short Entry: Conversely, in a downtrend on the Renko chart, look for the price to spike above the Anchored VWAP within a Renko bar, potentially indicating a shorting opportunity within the downtrend.

3. Volume Profile Analysis and Anchored VWAP for Identifying Liquidity Zones

Volume Profile Analysis (VPA) identifies areas on the chart where large buying and selling activity occurred. By combining VPA with Anchored VWAP, you can:

• Locate potential support and resistance zones based on volume imbalances.
• Use the Anchored VWAP to assess the strength of these zones based on volume-weighted average price.
• Long Entry: Look for the price to dip below the Anchored VWAP but find support within a high-volume zone identified by VPA. This might suggest a buying opportunity with strong buying pressure.
• Short Entry: Conversely, if the price rallies above the Anchored VWAP but encounters resistance within a high-volume zone on the VPA chart, it could indicate a potential shorting opportunity due to selling pressure.

4. Fibonacci Retracements and Anchored VWAP: Identifying Potential Reversal Points

Fibonacci retracements are used to identify potential support and resistance levels based on historical price movements. Here’s how to combine them with Anchored VWAP:

• Identify key swing highs and lows and plot Fibonacci retracement levels.
• Use the Anchored VWAP to analyze the price action around these Fibonacci levels.
• Long Entry: If the price dips towards a Fibonacci retracement level and finds support near the Anchored VWAP, it might indicate a potential buying opportunity due to a possible reversal.
• Short Entry: Conversely, if the price rallies towards a Fibonacci retracement level and faces resistance near the Anchored VWAP, it could suggest a shorting opportunity due to a potential reversal.

5. Utilizing Fibonacci retracements with Anchored VWAP for potential support/resistance levels

Building on the previous concept, you can use Fibonacci retracements not just for potential reversal points but also to identify dynamic support and resistance zones:

• Plot Fibonacci retracement levels based on a significant swing high/low.
• The Anchored VWAP can act as a dynamic confirmation tool within these zones.
• Long Entry: Look for the price to find support above the Anchored VWAP within a Fibonacci retracement zone, potentially indicating a buying opportunity with renewed buying pressure.
• Short Entry: Conversely, if the price encounters resistance below the Anchored VWAP within a Fibonacci retracement zone, it could suggest a shorting opportunity due to selling pressure.

How to Trade Anchored VWAP?

Anchored VWAP in Stock Trading

Stocks offer a diverse range of trading opportunities, and Anchored VWAP can be a valuable tool in this arena. Here are key considerations and examples:

Considerations:

• Stock Selection: Ideally, choose stocks with good liquidity and a history of trending price movements. Anchored VWAP can be less effective in low-volume stocks or those with frequent sideways consolidation.
• Timeframe Selection: The timeframe for your Anchored VWAP calculation should depend on your trading style. Day traders might use intraday timeframes, while swing traders could consider daily or weekly VWAP calculations based on their anchor points.
• Confirmation Signals: Combine Anchored VWAP with other technical indicators like moving averages, MACD, or support/resistance levels for confirmation before entering or exiting trades.

Examples:

• Breakout Entry: If a stock breaks above a key resistance level (acting as the anchor point), a pullback below the Anchored VWAP with high volume could signal a potential buying opportunity.
• Earnings Dip: After a positive earnings report, the stock price might surge initially. If it then dips below the opening price anchor with increasing volume, this could be a chance to buy on a pullback.

Anchored VWAP in Forex

Forex trading presents unique challenges and opportunities compared to stocks. Here’s how to adapt Anchored VWAP for currency pairs:

• Volatility: Forex markets are generally more volatile than stock markets. Consider using shorter timeframe Anchored VWAP calculations to capture these quicker price movements.
• Carry Trade: Carry trade strategies involve buying a higher-yielding currency and funding it with a lower-yielding currency. Anchored VWAP can help identify potential entry and exit points based on changes in the interest rate differential between the two currencies (acting as the anchor point).
• News Events: Forex markets are highly sensitive to news events. Be cautious about using Anchored VWAP immediately after significant news announcements. Let the market settle and re-establish trends before acting.

Anchored VWAP for Crypto Trading

The cryptocurrency market is known for its high volatility and dynamic nature. Here’s how to adjust your Anchored VWAP strategy for crypto trading:

• Increased Noise: Due to the high volatility, Anchored VWAP signals in crypto can be more prone to noise and false positives. Use stricter volume filters to focus on high-volume confirmations.
• Flash Crashes: Sudden price drops (flash crashes) are more common in crypto. Be mindful of these events and avoid using Anchored VWAP solely for entries during such periods.
• Emerging Markets: New and less established cryptocurrencies might have lower trade volume and less reliable historical data. Anchored VWAP might be less effective in these scenarios.

Anchored VWAP in Options Trading

Options trading involves additional factors beyond stock price movements. Here’s how to incorporate Anchored VWAP with options strategies:

• Delta: Delta indicates the rate of change of an option’s price relative to the underlying stock price. Anchored VWAP can be used to identify potential price levels where the Delta of your chosen option reaches a specific value, signaling a favorable entry or exit point.
• Implied Volatility (IV): IV reflects the market’s expectation of future volatility for the underlying stock. During periods of high IV, Anchored VWAP signals might be less reliable due to wider price swings. Consider using options strategies like straddles or strangles to hedge against increased volatility.

Anchored VWAP for Day Trading

Day trading thrives on capturing short-term price movements within a single trading day. Anchored VWAP can be a valuable tool for day traders, but the time-sensitive nature of this style requires specific considerations:

Timeframe Selection:

• Intraday Charts: Focus on intraday charts like 1-minute, 5-minute, or 15-minute intervals. This allows you to calculate the Anchored VWAP based on price and volume activity within the day.
• Dynamic Anchors: Since day trading deals with shorter timeframes, your anchor points can be more dynamic. Consider using:
  • Opening Price: The opening price is a natural starting point and anchor for the day’s VWAP calculation.
  • Intraday Highs/Lows: Significant highs or lows reached during the trading day can act as anchors to identify potential reversal points.
  • Breakout Levels: If the price breaks above resistance or below support, this level can serve as an anchor to assess buying or selling opportunities.

Volume Thresholds:

• Focus on High Volume: In day trading, short-term bursts of high volume can be more significant. Set higher volume thresholds within your Anchored VWAP calculations to filter out noise and focus on stronger signals.

Exit Strategies:

• Time-Based Exits: Day traders often target profits within the same trading day. Consider using time-based exits alongside Anchored VWAP signals. For example, you might exit a long position if the price fails to rise above the Anchored VWAP within a predefined timeframe.
• Trailing Stops: Trailing stop-loss orders can be helpful to lock in profits as the price moves in your favor. You can adjust the trailing stop based on the Anchored VWAP throughout the day.

Limitations of Anchored VWAP

While Anchored VWAP offers valuable insights, it’s important to understand its limitations to avoid misinterpretations and potential losses. Here’s a breakdown of some key Strength points vs weakness: