Anchored VWAP Trading Strategy – AVWAP Indicator Levels (Backtest)

While there are many different indicators used in technical analysis, only a few are deeply rooted in how price action is formed and how institutions, smart money, algorithms, and retail traders combined can give us a hint of how the price might react in certain situations. A popular example of such indicators is the Anchored Volume Weighted Average Price (AVWAP). You may already be familiar with VWAP, but do you know about the Anchored VWAP trading strategy?

Anchored VWAP (AVWAP) trading strategy is a VWAP trading method that involves setting an “anchor point” or starting point of the VWAP, and then comparing the current VWAP to the anchor point to determine if a security is trading at a premium or discount. If the security is trading at a premium, the strategy gives a sell signal, and if it is trading at a discount, the strategy gives a buy signal. The strategy is common among institutional traders.

In this post, we answer some questions about Anchored VWAP trading strategy and AVWAP levels.

What is the Anchored VWAP trading strategy?

Anchored VWAP (AVWAP) trading strategy is a VWAP trading method that involves setting an “anchor point” or starting point of the VWAP, and then comparing the current VWAP to the anchor point to determine if a security is trading at a premium or discount. If the security is trading at a premium, the strategy gives a sell signal, and if it is trading at a discount, the strategy gives a buy signal.

As with the traditional VWAP, it incorporates price and volume in a weighted average and can identify areas of support and resistance on the chart. But the traditional VWAP calculations always start with the first bar of the day and end with the final bar of the day. In some situations, a trader may want to analyze the VWAP line based on a starting point you prefer and also be able to extend that VWAP line beyond the end of the trading day. With Anchored VWAP, a trader can specify the price bar where calculations begin, making it easy to see whether the bulls or bears have been in charge since a very specific point in time.

Generally, the chosen starting price bar marks a shift in market psychology, such as a significant high or low, earnings, news, or other announcements. Institutional investors and traders often use this strategy to make decisions about buying or selling large blocks of stock.

What are the advantages of using an Anchored VWAP strategy?

Some advantages of using an Anchored VWAP strategy include:

• Objectivity: Anchored VWAP gives a clear and objective measure for determining if a stock is trading at a premium or discount.
• Real-time performance evaluation: Anchored VWAP is updated throughout the day, allowing you to make real-time decisions based on how the stock is performing.
• Market-neutral: The strategy is market-neutral in the sense that it doesn’t rely on predictions about the direction of the market but only focuses on the stock’s performance.
• Aligns with institutional trading: The strategy is often used by institutional traders and investors, which can make it easier to execute large trades without significantly impacting the stock’s price.
• Indicating the trend: VWAP can be used as an indicator of the trend — if the stock is trading above the anchored VWAP it may indicate an uptrend, and if it’s trading below, it may indicate a downtrend.
• Reducing impact cost: By using the anchored VWAP as a benchmark, you can aim to trade at a better price, reducing the impact cost of trading and improving the risk-reward ratio.