The article on Anchored VWAP on TradingView is the opinion of Optimus Futures, LLC.
Many day traders live and die by the Volume Weighted Average Price (AKA VWAP).
This multifaceted indicator not only clues you into market sentiment but can also act as a tradeable reference point.
However, its value ends with each trading session.
That’s great if you plan to close your positions each day. And if day trading futures is your thing, we encourage you to learn how to do it.
But what about anyone who wants to swing trade?
For that, we need to expand VWAP into something new – The Anchored VWAP – a robust tool available in Tradingview.
You see, the traditional VWAP is bound by the start and end of each trading session.
Anchored VWAP allows you to pick whatever starting point you want.
If you want to look at the volume-weighted average price on the S&P 500 E-mini Futures for the last month, set the starting point for the Anchored VWAP to the open of the first day of the current month.
Such a simple adjustment opens up a world of possibilities.
And that’s what we’re going to cover today.
This article aims to give you a better understanding of:
- How Anchored VWAP works
- Setting up Anchored VWAP in Tradingview
- Interpreting Anchored VWAP
- Trading strategies that use Anchored VWAP
- Common mistakes and how to avoid them
How Anchored VWAP Works
Imagine you go to the store and buy two chairs, one for $50 and the other for $100.
Your volume-weighted average price paid is $75.
That’s exactly how VWAP works.
The math goes like this:
- Multiply every transaction price by the volume of shares or contracts
- Add all that together
- Divide it by the total volume of shares or contracts
It’s extremely volatile early in the day when there hasn’t been a lot of trading yet. As the day progresses, VWAP becomes more stable.
You can see that in the chart below of the S&P 500 E-mini Futures:
The orange line represents VWAP, while the blue vertical lines denote each new tradings session.
TradingView connects the VWAP from one day to the next, while other platforms, like OptimusFlow, have gaps, as shown below:
While VWAP is an incredible tool, it’s ultimately limited by time constraints.
That’s what makes Anchored VWAP so powerful.
You can set its starting point anywhere you like, even somewhere intraday.
Anchored VWAP will begin its calculations from that point, continuing until you say otherwise.
Now, let’s see what Anchored VWAP looks like in Tradingview.
Setting up Anchored VWAP in Tradingview
Once you’ve logged into TradingView, you can follow these instructions to set up the Anchored VWAP.
In TradingView, Anchored VWAP is a drawing tool, not an indicator.
Before you begin, we recommend selecting the timeframe and setting up the chart to show the data you want.
You’ll start by selecting it from the drawing tools in the sidebar:
Next, you pick the spot/time you want the Anchored VWAP to start and then click on that area.
This will place the start of Anchored VWAP at that spot.
In the chart below, that point is denoted by the arrow.
When the drawing appears, you’ll see several items.
First, the inner blue line is the Anchored VWAP.
On either side of that, you’ll see green lines with shaded regions. These identify one standard deviation from the Anchored VWAP point.
This information can be changed, updated, or removed in the settings.
You can find the settings on the gear icon at the top of the screen or by right-clicking on the indicator and selecting settings.
If you want to adjust the starting position, simply find the large dot at the beginning of the channel (where you first clicked), click, and drag that dot to its new location.
Other traders have built custom Anchored VWAP indicators that you can add to your charts. Most either auto-select a time period or allow you to input a specific date and time to anchor VWAP.
Some great ones are worth exploring. And if you are a day trader, check out four indicators we highlighted as our top picks.
Now that we have the Anchored VWAP on our chart let’s discuss how you analyze it.
Interpreting Anchored VWAP
We’re going to use an hourly chart of the S&P 500 E-Mini Futures for our analysis.
In the chart below, we anchored VWAP to the first trading day of 2024.
In addition to Anchored VWAP and the one standard deviation bands, we added a second set of bands at two standard deviations.
Immediately, you should see that since early February, the S&P 500 E-Mini Futures have traded back and forth between the upper one and two standard deviation bands.
If you knew nothing else, that would be enough to create a simple trading strategy.
But let’s dig into this a bit further.
Since the market is trading consistently over the upper one standard deviation band, it signifies market participants willing to keep buying futures at higher prices than the average price for the year. In fact, they’re willing to buy futures outside of one standard deviation higher.
That’s a particularly bullish indicator, and one that confirms the market meltup underway.
Compare that to the Gold Futures chart below with VWAP anchored to the start of the year.
Like the S&P 500 E-Mini Futures, Gold Futures reversed when it hit the upper two standard deviation bands.
However, it did the same thing off the lower two standard deviation band.
In between, the price would find support and resistance at both the Anchored VWAP and one standard deviation bands.
It was only recently that Gold Futures climbed out of the range.
This reads as indecisiveness to start the year, followed by a strong bullish movement at the beginning of March.
With these types of analysis, we can now develop strategies that leverage Anchored VWAP.
Trading Strategies That Use Anchored VWAP
One of the best ways to use Anchored VWAP is as a mean-reversion tool.
This type of strategy uses the standard deviation bands to frame the setup.
Let’s go back and look at the Gold Futures chart.
The orange squares highlight a particular pattern that has emerged over time.
When the price would hit two standard deviations away from Anchored VWAP, it would reverse.
This worked five times before Gold Futures finally broke out of the trading range.
With the S&P 500 E-Mini futures, we see it happen when the price trades down to the upper one standard deviation band.
Chances are, this will keep happening until the uptrend is broken.
Here’s another easy way to use Anchored VWAP.
Let’s say you have a futures contract like Crude Oil that found a low. You decide to buy Crude Oil Futures.
You can set Anchored VWAP to that low and use it as a kind of trailing stop for your position.
With this chart, a trader might be willing to stay in a long Crude Oil trade so long as the price remains above Anchored VWAP.
Because of its flexibility, Anchored VWAP can be used in many ways. However, that can also come with a cost.
Common Mistakes and How to Avoid Them
When traders first find out about Anchored VWAP and see it working so well as support and resistance, they assume it will continue to do so.
This leads them to doubling down on positions and taking some hefty losses.
Like everything in the market, things can and will change.
Anchored VWAP can work for a period. But you never want to assume it will work forever.
Just look at how Gold Futures traded back and forth until it finally broke out.
The second most common mistake is leaving your anchor point.
While there’s something to be said about looking at specific timeframes like month or year to date, if you’re picking something else, like a rolling 3-week Anchored VWAP, you must remember to update it.
It sounds ridiculous, but traders often need to remember to re-anchor VWAP on a new month or week.
That’s when the custom-developed user indicators in TradingWiew that use rolling periods can be helpful.
Lastly, and this one is more subtle, realize the closer you are to the anchor point, the more volatile VWAP will be and the less reliable it will be.
There’s no specific time when Anchored VWAP or traditional VWAP goes from whacky to useful. It’s just more about common sense.
You want there to be enough volume that there’s an established VWAP traders would use as a reference point.
For traditional VWAP, that’s usually after the opening rush. For Anchored VWAP that extends of multiple days, you’d want at least a few days of data.
Final Thoughts
Anchored VWAP is an incredible tool that more traders should take advantage of.
It’s easy to set up and use in TradingView on stocks and futures charts.
Optimus Futures combines the power of TradingView’s tools with its premium brokerage service, offering traders a one-stop shop for their future trading needs.
Learn more about how to trade using TradingView with Optimus Futures by Clicking Here.
Trading in futures involves a significant risk of loss and is not suitable for all investors. Past performance is not necessarily indicative of future results. Any use of external indicators or downloaded materials is at the user’s own risk. The information provided herein is intended solely for educational purposes and does not constitute investment advice. Optimus Futures does not endorse or assume responsibility for the content or services of any external links referenced. The placement of contingent orders by you or broker, or trading advisor, such as a “stop-loss” or “stop-limit” order, will not necessarily limit your losses to the intended amounts, since market conditions may make it impossible to execute such orders.
