As a trader, navigating the markets today is nearly impossible without an effective analysis tool. One tool that has been gaining popularity lately is the Volume Weighted, Average Price (VWAP) auto-anchored indicator.
Like traditional VWAP, VWAP Auto Anchored Indicator, or AVWAP, is a technical analysis tool used to determine the average price of a security-based price, volume and time. However, unlike traditional VWAP, the timeframe, in this case, is defined by the user. This means the trader can calculate the VWAP from a different point other than the open.
Wondering what Anchored VWAP is exactly, and what features it offers? Read on.
We shall address all you need to know about VWAP auto-anchored indicator, tips on how it’s commonly used and how it differs from other indicators.
Traditional VWAP vs. VWAP auto-anchored indicator
To understand VWAP auto-anchored indicator and its use cases, you first have to understand what traditional VWAP is (the tool on which AVWAP was based).
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To break it down, VWAP is one of the most commonly used technical analysis tools. It considers a security’s price and volume to identify areas of resistance and support on the chart.
However, one defining quality of VWAP is that it’s a single-day indicator, which means VWAP calculations always resets at the beginning of each new trading day.
While this might work for intraday traders, it can limit users who want to hold positions for more than a day. Trying to establish an average VWAP over a certain time period could result in incorrect indicators.
And that’s where Anchored VWAP comes in.
Anchored VWAP
With Anchored VWAP, a user can specify the point where calculations start, thereby taking account of volume and price data from a significant event onward. With this, users can analyze the VWAP line from a less arbitrary beginning point and extend the line beyond just the end of the trading day. (Try out indicators on Tradingview.com)
VWAP auto-anchored indicator also stands out from other VWAP indicators in that it’s automatically linked to the start of the last available period and displayed from that point onward. This allows for easy calculation of market trends and price data over time from a particular inflection point, making it suitable for both swing traders and short-term investors.
VWAP vs. Moving Average Indicator
VWAP is usually arrived upon by multiplying the price by volume and dividing the figure by the total volume. Anchored VWAP, on the other hand, Is an average of VWAP values.
This should not be confused with a simple moving average indicator, which includes price in its calculation but doesn’t incorporate volume. Its calculation is also different. It’s done by adding up the closing prices over a certain period of time and then dividing the total by the time period.
When to Use Anchored VWAP vs. Traditional VWAP
As we saw, normal VWAP usually suffices for intraday trading as a trend indicator. It can also be used in different ways by Institutions and money in estimating the quality of the executions of their market makers or traders. VWAP can also be used by hedge funds for different strategies.
Anchored VWAP on the other hand, can prove more beneficial if you spot a big irregular trade or a large gap in the trading patterns down or up. For instance, if a certain company is trading at $20, and the trade jumps to $30 and then back down to $20, an anchored VWAP can help edit out the irregular trade.
Inputs Include:
When it comes to VWAP auto-anchored indicator calculations, there are various inputs you’ll need to adjust as a trader. However, the most common include:
Anchor period
This specifies where the VWAP calculations start and how often they happen. In VWAP auto-anchored indicator, your main option is auto, whereby the chart’s timeframe will determine the calculation. It’s automatically linked to the start of the last period on the chart and then displayed from that point.
Source
Traditionally, the source would be the average value of the bar. This would be hlc3 or hl2 on a typical chart. However, source doesn’t affect Anchor period calculation. The highest anchor will compare to high data, regardless of what the source is.
Other inputs include the length, bands multiplier, offset, style, Upper and lower band, Background and precision.
Takeaway
There are many ways you can use the VWAP auto-anchored indicator to your favour as a trader. By specifying the price bar where the calculations start, it makes it easier to identify how the market has been behaving from a specific point in time.
However, like most other analysis tools, the VWAP auto-anchored indicator is always best when used with a trading methodology or other indicators like momentum indicators like stochastic or MACD.
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