Day Trading Futures Using Anchored VWAP

In the trading market, technical analysis is commonly used to make price action analysis easier. Anchored Volume Weighted Average Price (Anchored VWAP or AVWAP) is a technical indicator firmly entrenched in how price action is produced. Many day traders are familiar with VWAP and use it daily, but some are unaware of AVWAP and its potential value to traders.

Let’s take a look at everything you need to know when using Anchored VWAP if you’re a day trader.

VWAP vs. Anchored VWAP

The VWAP calculations are tied to a specific price bar specified by the trader using the Anchored VWAP indicator. Both VWAP and Anchored VWAP use a weighted average of price and volume to identify support and resistance areas on the chart.

VWAP is a line on a price chart that starts new at the beginning of each trading day. Traders use VWAP in various ways, such as intraday support and resistance levels, to measure trend (a VWAP moving up suggests an uptrend, whereas a VWAP moving down suggests a downtrend), to predict reversals if the price moves far away from the VWAP, and so on.

VWAP comes with disadvantages, such as not being as responsive to more recent price action. The most significant disadvantage of VWAP is that it resets at the beginning of each day. As a result, swing traders cannot use it because it is calculated using only one day’s data.

Anchored VWAP was created by Brian Shannon of AlphaTrends to solve this, which anchored the VWAP at a specific point. The only distinction is that instead of starting VWAP at the beginning of the day, AVWAP can have any starting point.

Anchored VWAP lets you define the price bar from which calculations begin, making it simple to see if the bulls or bears have been in control since a specified timeframe. The Anchored VWAP is determined by aggregating the total dollars traded in a market for all transactions and dividing the total dollars by the total shares traded, starting with the chosen benchmark.

A movement in market psychology, such as earnings, significant highs or lows, news, or other announcements, is usually marked by the initial price bar that is selected. The Anchored VWAP line is tracked using price and volume data from that major event forward.

How to Trade Using Anchored VWAP

If you’re learning how to trade using anchored VWAP for the first time, you may feel overwhelmed. But we’re here to help you understand a few Anchored VWAP day trading strategies that will benefit your trading.

To understand how to trade using Anchored VWAP, you need to know where Anchored VWAPs are typically drawn from. The following are where you can anchor the VWAP from:

  • significant highs and lows
  • periods such as the start of the week, month, or year
  • gaps
  • the point of significant news and economic events

Significant Highs and Lows

Traders should use the previous highs and lows in whatever timeframe they are looking at as their first anchor. For example, if you consider the week’s high, you can anchor by using the previous swing high or low. The average price paid by traders on the high might be calculated using an anchor from the previous low. When the price tries to fall below it, it may act as support since anyone who bought during the surge (high) does not want to lose money defending their position.

When considering a significant low, the price will move upwards after the low. The VWAP gets anchored from that low and may find support points that the price could not break through. Buyers will jump in at every break to defend the AVWAP as a support. Whether the buyers are retail traders, major organizations, computer algorithms, or other entities, we know these levels are usually well-defended and can serve as excellent support and resistance levels.

swing vwap automatically anchored to recent swing highs and lows
Swing VWAP automatically anchored to recent high and low

As a retail trader, you can trade based on the levels. For example:

  • buying when we reach a support level – we can also buy when a resistance breaks, as this may signal the start of a new trend
  • selling when we reach a resistance level – we can also sell when a support breaks, as this may indicate that bears have become weak

Periods such as the Start of the Week, Month, or Year

Some of the essential AVWAPs you’ll use in your trading are the week to date (WTD), month to date (MTD), and year to date (YTD). These serve as significant levels of support and resistance. Many people begin new positions on both the long and short sides as a new year, month, or week begins. The WTD, MTD, and YTD AVWAPs represent the average price they paid for their positions over the respective period, and they defend these AVWAPs whenever the price tries to cross them.

Gaps

Gap ups and downs are another great anchor. When a price gap occurs, if many buyers or sellers enter aggressively and the price keeps trending in the gapped direction, the Anchored VWAP from the gap point might be an excellent level to observe for traders.

For example, several buyers would have added to or initiated bullish positions if you’ve gapped up and the trend is strong. The average price paid for their positions is determined by starting the VWAP from the gap. You will observe a strong support level whenever the price moves below the gap up AVWAP.

Significant News and Economic Events

You want to be anchored from significant events at all times. The more significant events for futures contracts are economic releases such as:

  • Non-Farm Payrolls (NFP): NFPs are a key economic indicator for employment in the United States. Understanding how this data is released can assist in the setup of forex trading to profit from unanticipated changes in employment.
  • Unemployment Rate: The Unemployment Rate is the percentage of the entire unemployed labor force actively looking for work in the preceding month. For example, a value that is greater than predicted is considered negative or bearish for the USD, while a value that is lower than expected is considered positive or bullish.
  • JOLTS Job Openings: The US Bureau of Labor Statistics conducts a survey to help measure job vacancies. It gathers information from employers on their employees, job opportunities, recruitment, hires, and terminations. Job openings are all open (unfilled) positions on the last business day of the month.

Additionally, the following are also economic releases that play a significant role in futures contracts:

  • CPI
  • Consumer Sentiment
  • PPI
  • Retail Sales
  • FOMC Statements
  • FOMC Projections
  • Fed Fund Rate
  • Unemployment Claims
  • Industrial Production
  • Existing-Home Sales
  • Philly Fed Manufacturing Index
  • Crude Oil Inventories
  • Durable Goods Orders
  • PMI
  • Average Hourly Earnings

Pullback and Breakout Strategy

For day traders looking to get the best price before the price climbs higher, the AVWAP pullback is the most popular Anchored VWAP day trading strategy. Because day traders close their positions before the market closes for the day, day traders are limited with their trading hours and have minutes to hours to complete a trade. As a result, the closest entry at a support level can be the difference between a trade’s success and failure.

This is an excellent place to enter a trade since you know that if it closes on the opposite side of your entry point, it’s time to exit and go on to the next trade.

The VWAP breakout setup, on the other hand, is aiming for a break above the VWAP itself, preferably with strength, rather than a breakout to new highs.

For newer traders and those unfamiliar with the VWAP indicator, VWAP breakout entries are a terrific alternative and require less tape reading skills. To put it simply, you wait for the stock to test the VWAP on the downside. After that, you’ll want to see if the stock closes above the VWAP. Then, above the high of the candle that closed above the VWAP, you’ll place your buy order.

While this is a more straightforward trade entry method, it may expose you to greater risk because your entry will be further from the low and a logical stop. Your success rate, on the other hand, may mitigate the risk. To identify which entry method is best for you, you must first determine where you are in your trading journey and your risk appetite.

Practicing with Anchored VWAP

The key to making money in the markets is to practice. Risking your money on the stock market before you’ve perfected a strategy is foolish and unreasonable.

Placing AVWAP on your charts is one of the best ways to practice with it. After that, you can move the anchor around and see what happens. Some questions to ask yourself while practicing include:

  • Where are your support levels?
  • What is the point at which it breaks?
  • Can a chart with several AVWAPs provide more information about where long-term money is located?

It’s suggested you should use the indicator to mark significant areas of the chart, such as events, highs,  lows, huge volume days, etc. The default settings are usually standard as with any indicator, but you will benefit by experimenting and getting comfortable with the Anchored VWAP.

Conclusion

In terms of determining support and resistance levels, Anchored VWAP offers all of the benefits of traditional VWAP. It also offers the advantage of allowing you to pinpoint the specific timeframe in which you should study. You can remove price action driven by another market psychology by starting VWAP calculations at the moment of a significant turning point.

AVWAP is one of the strongest technical indicators available, and if you understand how to use it, you’ll see these support and resistance levels all over the place. The Anchored VWAP, like all other technical indicators, should be used in conjunction with other indicators and analysis techniques.

anchored vwap for ninjatrader 8 software box

Published by CodeNTrade

The nexus of Software Development and Trading

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