This makes an inability to identify the trend within the unstable market results in less-than-optimal entry points for most traders. Within the volatile market, most become confused in coming in line with the happening market trend. This leads to entering most trades at less-than-good times or even missing excellent occasions. Such vagueness can be expensive in many ways and even leads one to lose money on trade.
One of the tools that most traders overlook is the Anchored VWAP. This is found on most platforms and is helpful in getting the right entry and exit points, besides allowing traders to evaluate the dominant trend with much accuracy.
In this article, we will discuss how to use the Anchored VWAP as the most powerful trend indicator in the market. It is anchored from significant market events, such as earnings releases or major breakouts, where traders can gain insights into trend direction, entry points, and overall management of trades.
What is Anchored VWAP?
Anchored VWAP calculates the average price of an asset over a certain period of time but weighted by volume, anchored to a given point. The given point is often a big event that has occurred: it may be an earnings release, breakout, or swing high/low. This anchored VWAP doesn’t reset the way standard VWAP does day after day but rather holds steady from a chosen point and can help with trend analysis and bigger-picture trades.
This indicator is helpful in showing whether buyers or sellers are controlling the market since the anchor point chosen gives insight into market sentiment.
The Major Applications to Help Apply Anchored VWAP as a Trend Indicator
- Anchoring of VWAP on Earnings Release for Swing Trades
One powerful usage of the Anchored VWAP is its ability to be anchored from the day of an earnings release. An announcement of earnings will drive some very big price movements; therefore, one can really make use of this anchor by letting market sentiment determine trade management from the point of anchoring.Example: The following is an example of how anchoring works as a type of support level using Oracle’s 15-minute chart from last quarter’s release of earnings. This support level was a moving anchoring of VWAP anchored the VWAP to the earnings candle. Although price is ranging about this VWAP and though buyers from the earnings event are still in control it means that a strong, sustained bullish trend as long as it is maintained at the same level.
Trade Management: Use the Anchored VWAP as a trailing stop. If the stock is holding above that VWAP, you keep your long. If it closes below that VWAP, you start to think about getting out of your trade because now you think the market’s sentiment has shifted.
- Anchor the VWAP off Major Breakout Levels
A better approach is anchoring VWAP from a key breakout level. It gives an opportunity to see how well the stock holds the trend after a breakout or whether pullbacks down to VWAP are excellent buy areas.Example: On NVIDIA’s daily chart, the Anchored VWAP from the $500 breakout point at the beginning of the year was used as a support level on pullbacks. Every time the price tested this VWAP, buyers stepped in, showing strength and suggesting a continuation of the bullish trend.
Buy Pullbacks: When the price pulls back to the anchored VWAP and finds its support, then it means that buyers are interested at that very level. Traders can take advantage of this situation and buy the dips as it indicates that the stock remains under strong demand despite minor pullbacks.
- Anchored VWAP from Swing Highs and Lows
Anchoring VWAP from a swing high or low proves helpful in identifying key support and resistance levels. This is an effective technique for all types of traders-be them long-term or short-term users who want to establish a trend relationship.Example: In the recent SPY daily chart, anchoring VWAP from the swing low on August 5th, that was a low point due to market-wide volatility, shows a crucial support level. When the market retraced in September, it tested this anchored VWAP and bounced, showing that buyers are still in control.
Control of the Trend-Interpretation: Respect of anchored VWAP on a pullback suggests that, if it was anchored at a low, buyers continue dominating the trend; if at a high, sellers still dominate.
This strategy also can be applied to much shorter time frames, say 1-minute charts for intraday trading.
An Advanced Anchored VWAP Strategy: The Adjusted Anchor for Highs and Lows
Adjust to Basic Highs/Lows
This is one subtle but very powerful improvement: instead of using the average price of the Anchored VWAP, you could use the highs or lows of each bar. It moves the VWAP a bit less, but on the order of half the Average True Range (ATR) and you get a much more precise view of where support and resistance are.
How To Apply This Strategy
- Anchoring from a Low Swing: Here, we calculate VWAP using lows of each candle to anchor out of a low swing, which gives a slightly more conservative level and frequently acts better as a support area.
- Anchoring from a Swing High: When anchoring VWAP from a swing high, compute it using the highs of each candle. This gives you an enhanced level of resistance that represents the upper limits where the sellers would most probably appear.
This slight modification can enhance the chances of correct support and resistance levels so that entry and exit points in any systematic strategy are very accurate.
Practical Counsel on Utilizing Anchored VWAP within a Systematic Trading Strategy
Additional Tips to Enhance the Efficiency of Anchored VWAP
- Use Anchored VWAP with Trend Indicators: Anchor VWAP blends well with other trend indicators, such as MA. Confirmation of strengths in the trend using a 50-day SMA along with Anchored VWAP will help.
- Monitor Volume at Anchored VWAP Levels: Sudden surges in volume around the Anchored VWAP can mean that institutional interest is strong. Growing volume into a price close to the VWAP tends to show it as a spot of support or resistance and, therefore, as likely entry or exit point.
- Don’t Buy the Dip—Buy Strength After the Dip: A mistake that many people make is buying immediately when the price touches the Anchored VWAP. However, wait for confirmation of a bounce or strength in the price after the dip. This ensures that the market is indeed responding to the VWAP as anticipated.
- Use Multiple Anchored VWAPs: For a more holistic view, you may anchor multiple VWAPs from important events such as swing highs, lows, and breakout points. It is here that you are able to spot the zones where price tends to confluence to form stronger support or resistance levels.
Conclusion
The Anchored VWAP is an extremely powerful trend indicator that gives you strategic advantages in trading. Anchoring of VWAP to key inflection points, such as earnings releases, breakout days, and major swing highs or lows, will give you a better perspective about the dominant market trend and help you pick high-probability entry and exit points.
Whether you are a long-term trader looking to ride trends or an intraday trader seeking precision, Anchored VWAP provides a flexible tool to align with the trend and improve trade timing. Start implementing this technique today and watch how it transforms your understanding of trend direction and trade execution.