Anchored VWAP trading strategy — AVWAP Levels (Backtest – How To Trade It)

Last Updated on January 17, 2023

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.

1. 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.

2. 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.

3. What types of trading styles can benefit from an Anchored VWAP strategy?

Anchored VWAP strategy can be used in a variety of different trading styles, including:

  • Algorithmic trading: Algorithmic traders can use the Anchored VWAP to determine their entry levels based on how the price is performing relative to the anchored VWAP.
  • Scalping: Scalpers can use the strategy to make quick trades based on small discrepancies between the current VWAP and the anchored VWAP.
  • Day trading: Day traders can use daily VWAP anchor levels to determine if a stock is overbought or oversold for the trading day and make decisions about buying or selling based on that information.
  • Swing trading: Swing traders can use the anchored VWAP strategy to identify entry and exit points in the market based on how the stock is performing relative to the anchored VWAP when used as weekly or monthly VWAP.
  • Trend following: Traders who follow the trend can use anchored VWAP as an indicator of 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.

It’s worth noting that the Anchored VWAP strategy is commonly used by institutional traders who use it to make decisions about buying or selling large blocks of stock without significantly impacting the stock’s price. However, it can also be used by retail traders who may want to combine it with other indicators.Top of Form

4. What are AVWAP levels and how do they impact the Anchored VWAP strategy?

Anchored VWAP levels refer to the different points at which the anchored VWAP line is calculated. The anchored VWAP strategy typically uses multiple levels to provide a more comprehensive view of the stock’s performance.

Some common anchored VWAP levels include:

  • Daily VWAP: This level calculates the VWAP for a single trading day. It can be used to determine if a stock is trading at a premium or discount during that day.
  • Weekly VWAP: This level calculates the VWAP for a single trading week and can be used to determine if a stock is trading at a premium or discount over that period of time.
  • Monthly VWAP: This level calculates the VWAP for a single trading month, which can be used to determine if a stock is trading at a premium or discount over an even longer period of time.

The impact of these levels on the Anchored VWAP strategy is that the longer the period of time, the more reliable the data is because it’s less affected by short-term fluctuations. You can use multiple levels of anchored VWAP to gain a more complete view of how a stock is performing over time, and make more informed decisions about buying or selling.

For example, if a stock is trading at a premium according to the daily VWAP, but at a discount according to the weekly and monthly VWAP, it could indicate that the stock is experiencing short-term volatility, but is overall undervalued. You can use this vital information to make more informed decisions about buying or selling the stock.

5. What are the risks associated with the Anchored VWAP trading strategy?

Some of the risks include:

  • Lack of market context: The strategy relies on VWAP as a measure of performance, but it doesn’t take into account other factors that could impact a stock’s price, such as fundamentals or market sentiment.
  • Limited flexibility: The strategy is based on a specific set of rules and conditions, so it may not be flexible enough to adapt to changing market conditions.
  • False signals: The strategy relies on the assumption that the stock is trading at a premium or discount relative to the anchored VWAP, but this may not always be the case. False signals can occur if the stock is experiencing abnormal volatility.

6. How can traders use the Anchored VWAP trading strategy to their advantage?

Here are a few ways traders can use the AVWAP to their advantage:

  • Using it as a reference point: Traders can use anchored VWAP as a reference point for their trades, 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.
  • Using multiple anchored VWAP levels: By using multiple anchored VWAP levels, traders can gain a more complete view of how a stock is performing over time, and make more informed decisions about buying or selling.
  • Combining it with other indicators to form a better strategy: Traders can use the Anchored VWAP strategy in conjunction with other technical indicators such as moving averages, RSI, or Bollinger Bands to get a better understanding of the stock’s performance and potential trend.
  • Setting stop-loss and take-profit orders: Traders can use the Anchored VWAP strategy to set stop-loss and take-profit orders to limit their potential losses and maximize their gains.

You should note that the AVWAP strategy is not a standalone strategy and should be in the context of a comprehensive trading plan with appropriate risk management and position sizing.

7. What indicators are most useful for traders using the Anchored VWAP trading strategy?

To gain a more complete view of how a stock is performing, traders using the Anchored VWAP trading strategy can use can combine it with any of these indicators:

  1. Momentum oscillator: RSI and stochastic are momentum indicators that can be used to determine if a stock is overbought or oversold.
  2. Bollinger Bands: Bollinger Bands can be used to measure volatility and to determine if a stock is trading in a tight or wide range relative to the anchored VWAP.
  3. MACD: Moving Average Convergence Divergence (MACD) is a momentum indicator that can be used to identify potential buying or selling opportunities.
  4. Fibonacci retracement: Fibonacci retracement can be used to identify potential support and resistance levels in the stock’s price.

8. How is the Anchored VWAP strategy different from other VWAP strategies?

Anchored VWAP strategy is different from other VWAP strategies in that it sets a specific “anchor point” or starting point, and then compares the current VWAP to the anchor point to determine if the stock is trading at a premium or discount. This is different from traditional VWAP strategies which only rely on the current VWAP.

Also, the Anchored VWAP strategy usually uses multiple levels (daily, weekly, monthly) to provide a more comprehensive view of the stock’s performance, whereas other VWAP strategies might only use one level. VWAP strategies such as Multi-session VWAP (MSVWAP) or Intraday VWAP, take into account multiple sessions or intraday data to calculate the VWAP, while others, such as Adaptive VWAP or TWAP (Time-Weighted Average Price), use a dynamic algorithm to adjust the VWAP according to the volume or time of the trade.

9. What strategies can traders use to manage their risk when using Anchored VWAP?

Traders can use several strategies to manage their risk when using the Anchored VWAP strategy, including:

  • Position sizing: With position sizing, traders can control their risk by limiting the amount of capital they put at risk on any single trade.
  • Setting stop-loss orders: A stop-loss order is an order that automatically exits a trade when the stock reaches a certain price. This can help limit potential losses if the stock’s price moves in the opposite direction of the trade.
  • Diversifying the portfolio: Diversifying the portfolio by investing in different stocks, sectors, or even asset classes can help mitigate risk.
  • Measuring portfolio risk: You can use tools like value at risk (VaR) or expected shortfall (ES) to measure and quantify the risk of a portfolio.

You should note that no risk management strategy is foolproof, and traders should continuously monitor their positions and adjust their risk management strategies as needed.

10. How can traders determine the best AVWAP levels to trade?

Traders can determine the best anchored VWAP levels to trade by considering their preferred trading style, timeframe, market condition, and volatility level. You may have to backtest different anchored VWAP levels to find the best one for your strategy and risk appetite. However, using multiple anchored VWAP levels can provide a more comprehensive view of the stock’s performance.

11. What are the best practices for trading with Anchored VWAP?

Here are some best practices for trading with Anchored VWAP:

  • Use multiple anchored VWAP levels
  • Combine with other indicators
  • Monitor volatility
  • Adapt to market conditions
  • Use proper risk management
  • Backtest your strategy

12. How can traders stay ahead of the market when using the Anchored VWAP strategy?

Traders can stay ahead of the market when using the Anchored VWAP strategy by doing the following:

  • Continuously monitoring the asset they are trading
  • Keeping an eye on market conditions
  • Using multiple levels of anchored VWAP
  • Combining it with other indicators
  • Adapting to new market trends
  • Continuously studying and learning the market
  • Staying up to date on the company fundamentals
  • Keeping a trading journal

Similar Posts