For traders interested in trading and keeping track of securities, charts are very important; this is why we have indicators. They give traders insight into an asset’s performance so they can make the best decision. One such indicator is the anchored volume weight average price (anchored VWAP).

Securities represent ownership or debt in a business. In crypto, securities are tokens, and with the crypto market’s volatility and price fluctuation, the anchored VWAP indicator is a great tool.

What is an Anchored VWAP Indicator?

The Anchored Volume Weighted Average Price Indicator (VWAP) is a technical analysis tool used to analyze trading charts and predict price actions. It differs from other tools because it shows the relationship between a specific asset’s price action and volume.

Before it started getting applied to crypto trading and automatically integrated into cryptocurrency trading charts, the Anchored VWAP was merely a formula used to see the average price of the token over a particular period. But in today’s market, most trading platforms have automated the formula to appear alongside the price line as a plotted line on the trading chart. The automated indicator works by taking into account the price fluctuations and the volume at which the coin is traded at varying across varying periods.

Before the anchored VWAP, there was the VWAP, which could only show the average within a trading day. With an anchored VWAP, users can examine the price average over a longer time frame.

History of Anchored VWAP Indicators

The Anchored VWAP indicator is an evolution of the volume-weighted average price (VWAP) that was made in the 1980s by a man named Kyle Krehbiel. The VWAP indicator became a powerful tool that users could consult before making a market decision, as it applied both the asset’s price and trading volume to determine its average.

The anchored VWAP was made by the physicist Paul Levine, who built on the existing framework of the VWAP indicator and developed the anchored VWAP indicator. With the anchored VWAP indicator, users can fix any time frame to determine the average price. For example, they could set the “anchor” at the project’s last price uptick until the current trading day. The anchored VWAP indicator will find the average, and they can make a better market decision. The anchored VWAP has now crossed over into the Web3 space and has been a great addition.

How does the Anchored VWAP Indicator work?

The anchored VWAP indicator is built on a mathematical formula. Interested parties can calculate the formula on their own, but modern trading platforms would have the formula embedded, and in this state, it becomes a tool called the Anchored VWAP indicator. Users can simply select the time frame they are interested in, and the formula will take it from there.

The math formula for calculating the anchored VWAP is

= Cumulative (Price × Volume) / cumulative Volume

The numerator adds up the price, while the denominator adds up the volume, this simple line of math changed the way business decisions are made. The anchored VWAP has the same formula as the regular VWAP; the key difference is in the time frame users can search for, anchored VWAP lets users see weeks and years of trading.

The anchored VWAP is represented as a graph line that goes on top of the price line, representing the rise and fall of the security’s price. If the anchored VWAP line is higher than the token’s price, it tells buyers the token is bullish. If it’s the opposite, then the token is bearish.

The beauty of the anchored VWAP indicator is that users can anchor it to particular events in the token’s timeline. Users can use this to make assessments before making a move. For instance, if there is news of an attempted hack on a project, a user can set the anchored VWAP to the date or time the news broke to see how the project is faring and if it is still safe to purchase. Essentially, with an anchored VWAP, traders can make better-educated decisions.

How to Trade Using the Anchored VWAP Indicator

With the indicator, traders typically “anchor” a line at significant points in the chart, like a high price bar. To use an anchored VWAP indicator, traders can use the formula shown earlier; however, most trading platforms already have it integrated. Traders using Gate.io can search for their preferred token chart and click on the projection indicator on the left-hand side of the chart. They can click on it to reveal a drop-down menu where they can select anchored VWAP and then click on their preferred time frame to see the price projection.

Using the indicator, traders watch out for support and resistance. There is support when the anchored VWAP line exceeds the current price point. This shows that the token is bullish.

Resistance occurs when the indicator line is lower than the price point; this means the token is bearish.

The crypto market is known for its volatility, so traders are advised to use other trading strategies and indicators to make even more informed decisions.

What Trading Strategies Work With the Anchored VWAP Indicator?

The indicator is a tool, but just like any tool, a user needs to know how to wield it and use it strategically. There are great strategies that work great with anchored VWAP indicators. Here are some of them:

Breakout Strategy

As we said earlier, an anchored VWAP indicator shows support, resistance, and trends in the market. Using the breakout strategy looks something like this: users can notice some support while using the indicator. This little support could be the start of a trend, where the price of the assets rises. They could then make market moves to take advantage of the trend that is just starting. In this scenario, they could buy into the asset, hold a long position, etc. The same happens if resistance is spotted, but in this instance, they would take a short position to benefit from the new.

Strong Anchor Strategy

Perhaps the most important thing to note when using an anchored VWAP indicator is where to put the anchor point. The right anchor point tells a story and helps the user understand the market psychology. A good strategy would be to put an anchor at a significant date that could have impacted the asset price, like a product launch, hacking, or a change in key roles.

Multiple Anchor Strategy

When using the anchored VWAP indicator, the results users get are dependent on where they put the anchor point. Anchor points are significant, but why stop there even if you select a good anchor point? With an anchored VWAP indicator, users can select multiple anchor points; with this, they will have more data to study. Users can place an anchor point as recent as the last 24 hours and another two months before. They can also place an anchor on a high or low point.

Source: gate.io

Comparing Anchored VWAP to Other Indicators

If users want information on an asset’s price performance, they could use the anchored VWAP indicator, but it has blind spots. Other technical indicators give insight into an asset’s volatility, momentum, trend strength, etc. It is advised that users use a mix of indicators to better understand the market psychology and make informed market moves.

We have already discussed the VWAP indicator, the predecessor of the anchored VWAP indicator, but here are some more indicators to look into:

On-Balance Volume (OBV)

The on-balance volume (OBV) indicator looks into every volume-centric data from an asset and simplifies it. This indicator takes the volume data and puts it into a flowing line; it confirms trends, but it does not predict price movement. For example, when the price of the asset and the OBV move in different directions, the price will likely change. But if the price and OBV both go down, this probably means that the price is about to flatline.

Moving Average Convergence Divergence (MACD)

Another important indicator is the Moving Average Convergence Divergence (MACD%20is%20a%20technical%20indicator,from%20the%2012%2Dperiod%20EMA.)), which is used to track the momentum of a trend. Users calculate MACD with the formula: 26-period exponential moving average (EMA) minus the 12-period EMA. The MACD works well with the anchored VWAP indicator; if an asset’s price is over the anchored VWAP line and bearish with MACD, then we can say that the upswing will continue. But if the opposite happens on both indicators, then that suggests the asset will continue to decline.

Relative Strength Index (RSI)

The Relative Strength Index (RSI) is another indicator that shows momentum, but the RSI shows the momentum of a price, and it lets users know if a crypto asset is overbought or oversold. Using this with this anchored VWAP indicator will help users see the charts more clearly. If the price is above the anchored VWAP line but the RSI says the asset is overbought, the asset might go through a price correction soon.

Conclusion

The anchored VWAP indicator is a great tool for tracking an asset’s price performance and trends. With this information, users can make informed market decisions. This indicator is a variant of the VWAP indicator that can only track a single day’s market performance. There are other indicators, and if used together with the anchored VWAP indicator, users can have better insight into assets.