What is the Anchored VWAP?
The AVWAP, or Anchored VWAP (Volume Weighted Average Price), is a trading indicator that represents the average price of a security, factoring in both its price and volume, starting from a specific point in time. This point, or “anchor,” can be any significant event or moment chosen by the trader, such as earnings announcements, previous highs/lows, or the start of a new trend. By anchoring the VWAP at a specific event, traders aim to gain insights into the security’s price relative to that event, providing a deeper analysis than the standard VWAP, which typically resets daily.
The AVWAP is used by traders and investors to:
- Identify trend direction: By comparing the current price to the AVWAP, traders can gauge whether the short-term trend is bullish or bearish. Prices above the AVWAP indicate a bullish trend, while prices below suggest a bearish trend.
- Determine entry and exit points: The AVWAP can act as a level of support or resistance. Traders might consider buying near the AVWAP during uptrends or selling when the price falls below it during downtrends.
- Evaluate the fairness of the current price: Comparing the current price to the AVWAP helps traders assess whether the security is overvalued or undervalued relative to the chosen anchor point.
The AVWAP’s effectiveness comes from its ability to filter out the noise in price movements by emphasizing the importance of volume. This makes it a valuable tool for traders looking to make informed decisions based on historical price action anchored to significant events.
How is AVWAP different to the traditional VWAP?
The AVWAP (Anchored VWAP) indicator is a variation of the traditional Volume Weighted Average Price (VWAP) used in trading. The traditional VWAP provides a cumulative average price of an asset based on both price and volume, acting as a trading benchmark over a standard time frame, typically one day. It’s a useful indicator for traders to determine whether they are paying a fair price for the asset.
AVWAP, or Anchored VWAP, extends this concept by allowing traders to select a specific starting point from which to calculate the VWAP. This starting point can be any significant date, such as the release of earnings reports, product launches, or other market-moving events. This customization makes AVWAP particularly useful for assessing how an asset has performed since a particular event, giving traders insight into how current prices compare to historical prices since that time.
The AVWAP is commonly used to identify levels of support or resistance and can help traders make decisions about entry and exit points based on how the price interacts with these levels. By focusing on a specific timeframe, traders can gain a better understanding of market sentiment and trading behavior associated with particular events.
Due to the anchoring possibility at any bar, the AVWAP can be used on the daily timeframe, whereas the VWAP can only be used on the intraday timeframe due to the fact that it resets at the beginning of each day.
How is AVWAP calculated?
The calculation of the Anchored VWAP (AVWAP) involves a similar approach to the standard VWAP, but with a defined start point that can be anchored to any specific event or date. This allows for more tailored analysis over a chosen period. Here’s how AVWAP is generally calculated:
- Select the Anchor Point: Determine the starting date or event from which you want to begin the calculation. This could be a specific day, like the day of an earnings release, a major announcement, or any other significant date.
- Calculate Cumulative Typical Price Multiplied by Volume:
- For each period (minute, hour, day, etc. depending on the chart resolution), calculate the typical price, which is usually the average of the high, low, and closing prices: Typical Price = (High + Low + Close) / 3
- Multiply the typical price by the volume for that period: PV = Typical Price * Volume
- Sum Over the Period:
- Sum the calculated values of typical price multiplied by volume starting from the anchor point up to the current period. PVc
- Also, sum the volumes over the same period: Vc
- Divide the Cumulative Totals:
- The AVWAP is then calculated by dividing the cumulative total of the typical price multiplied by volume by the cumulative total volume: PVc / Vc
The result is a dynamic indicator that adjusts as new data points are added but remains anchored to the specified start point. This allows traders to analyze the price movement relative to volume from a significant event, helping to understand how the market has digested and reacted to that event. AVWAP can be a powerful tool in technical analysis, offering insights into trend direction, potential support/resistance levels, and areas of price consolidation.
What does AVWAP look like on a chart?
Here’s a daily chart of Microsoft (MSFT) with the AVWAP indicator added and the anchor point set a specified number of bars prior to the end of the chart:
The red line is the AVWAP which is anchored on bar 25 from the end of the chart. You can see that MSFT generally stayed above the AVWAP and it appeared to offer some support for price.
In EdgeRater this indicator is called the AVWAP and you give it a parameter indicating the number of bars from the end of the chart to anchor at.
Here’s another variation of the AVWAP indicator:
In this case the AVWAP calculation is performed for every bar of the chart, each bar anchoring N bars prior. The resulting value is then plotted daily. In effect the line represents the ending value of AVWAP for every bar.
In EdgeRater this indicator is called AVWAP_CONTINUOUS and it takes 1 parameter indicating the number of bars to use for the anchoring.
Here’s another version of the AVWAP indicator:
In this version the AVWAP is anchored on the first bar after earnings are released. This is the bar that represents a reset in trader knowledge of the fundamentals of the company. You can see that after the first earnings on the chart the indicator is re-anchored to the typical price of the first bar and accumulates a new value each day based on the price and volume action. After that earnings period it appeared to offer some support to price levels. Technical analysts might look at the price action there and call out the cup-with-handle and subsequent breakout. It’s interesting that the AVWAP offered some support at the bottom of the cup and handle.
In EdgeRater this indicator is called the AVWAP_EARNINGS indicator and it automatically re-anchors on the first bar after earnings.
Summary
The AVWAP indicator is a variation of the traditional VWAP indicator offering flexibility in anchor placement. EdgeRater users can use this newly added indicator as an extra tool to inform their trading decisions. Also, the indicator can be used in EdgeRater as part of any backtest strategy so that users can independently determine extra edges that might be available. One group that is actively researching this indicator as part of a larger system development project is the OWL bundle user group run by AbleWayTech in conjunction with Dr. Ken Long.
You can take a free, full featured trial of the EdgeRater software (used for the charts in this post) by clicking HERE.