Anchored volume weighted average price or simply AVWAP is a previous meaningful benchmark price on a chart chosen by traders that quantifies the average price a market has traded at through a time period, based on both volume and price. This metric is important because it provides traders with a visual into the nature of the trend and the average technical value of a stock from a defined starting point.
The theory behind the anchored VWAP is like much of technical analysis is that charts have memory based on past key levels of transactions. Old resistance can become new support as traders that missed the breakout buy their second chance to get in at that price as one example. A lot of price action happening at one price level can create new price action based on past memory in the future based on an anchoring bias. People that missed a gap breakout may want to buy when price pulls back to the initial level of the gap. .
The VWAP line shows one line on a chart anchored to a chosen starting point and can be for any timeframe. Some traders use the VWAP as one filter for their trend trading rules. It has become a popular tool for many day traders on intraday charts.
The formula for the anchored VWAP is calculated by starting at the chosen benchmark and adding together the total dollars traded in a market for all the transactions and then dividing the total dollars by the total shares traded. The Anchored VWAP line on a chart shows the quantified volume weighted average price for a time period, beginning from a chosen starting point. This calculation is represented as a line on the chart that moves and adjusts to new information as it is created.
Here are key areas that a anchored VWAP can start its calculations from these starting points inside a timeframe:
Standard deviation bands can also be created starting at an anchored VWAP starting point using Fibonacci levels and percentage bands. This is one way to quantify reversion to the mean trades.
The older the anchored VWAP starting point becomes on the chart, the less the AVWAP line will react to it and change based on it because so much price information is involved in the formula. Closer AVWAP points create more meaningful lines of support and resistance most of the time.
The AVWAP is a technical indicator that combines price, volume and time. This triple layered indicator can smooth price data and measure the sentiment and trend over time from a key inflection point.
The AVWAP can be used much like a moving average for trend trading based on direction and slope as well as seeing how far price is stretched from the mean price by adding standard deviation bands around it.
The anchored VWAP can be part of quantifying your own trading signals based on your own timeframe and backtesting to see how it has worked on the charts for your watchlist over time.