The article on Anchored VWAP is the opinion of Optimus Futures, LLC.

• The Anchored VWAP provides a more contextual and accurate representation of price movements by “anchoring” the price data.
• It’s useful for identifying support and resistance, assessing trend direction and strength, and analyzing market reactions to significant events.
• Common mistakes when using Anchored VWAP include over-reliance on it as a support/resistance level, failing to re-anchor, not considering volatility near the anchor point, and ignoring the broader market context.

Many day traders heavily depend on the Volume Weighted Average Price (VWAP) to guide their trades. The VWAP is a useful indicator that shows market sentiment and can act as an important reference point for trading.

What is the Anchored VWAP?

The Anchored VWAP (Volume Weighted Average Price) is an indicator that calculates the average price of an asset, weighted by volume, from a specific starting point or “anchor,” such as a significant high, low, or event date.

The “anchor” aspect is important, as it can offer a more contextual and accurate representation of price movements compared to traditional VWAP, which resets daily. For example, a trader might set the anchor point at a significant high or low, an earnings announcement, a gap, or any market-moving event that a trader may deem important.

The Anchored VWAP can be useful for identifying support and resistance, assessing the direction and strength of a trend, and analyzing the market’s reaction to specific events.

From setting customizable timeframes to gaining deeper, fine-tuned market insights, you’ll learn how this advanced tool can significantly improve your trading approach.

Activating Anchored VWAP on Optimus Flow

To enable the Anchored VWAP on Optimus Flow, follow these simple steps:

1 – Right-click on the chart.

2 – Go to “Volume Analysis” and click “Show Toolbar.”

3 – Select “Custom VWAP.” in the toolbar below (see highlighted image)

4 – Two blue lines will appear, indicating the date range to anchor from. Choose your desired start point and click to set the anchor.

Note that a major high was selected. Once you click it, the result is as follows:

Learn how to use Anchored VWAP on TradingView | TradingView Anchored VWAP Indicator: Guide for Traders

Tips for Using the Anchored VWAP

1 – Select an Anchor Point

Choosing the right anchor point is crucial. Significant swing lows or highs are typically the best points to anchor from. For example, in the image below, the swing low and swing high (see yellow arrows) could have served as effective anchor points.

2 – Analyze Price Reactions

Observe how the price interacts with the Anchored VWAP. If the price consistently respects the Anchored VWAP, it indicates a strong relevance. Conversely, frequent invalidations suggest that the chosen anchor point might not be significant.

In the case below, the Anchored VWAP held (see pink arrows) up until the red rectangle. What happened? There was a major fundamental shift in the markets in which overvalued tech stocks were slowly going out of rotation (pay attention to fundamentals too, or else, you won’t be able to understand major shifts in the market).

3 – Using Multiple Anchored VWAPs

Anchoring from both swing lows and highs can provide deeper insights. This dual approach, known as the VWAP pinch, involves the price moving between the anchored points from both extremes, resembling the behavior seen with Bollinger Bands.

In this example, an anchor at the swing preceding the swing low was added, creating a band around the price action.

4 – Practical Application

The Anchored VWAP can be applied from various significant market events beyond just swing highs and lows. For instance, anchoring from the start of the year, major earnings announcements, or gap events can provide valuable insights into market behavior post these events.

Common Mistakes and Their Solutions in Using Anchored VWAP

1. Assuming it Will Always Work as Support and Resistance

• Mistake: Traders often assume that because Anchored VWAP has worked well as a support or resistance level in the past, it will continue to do so indefinitely. This overconfidence can lead to doubling down on positions and incurring significant losses when the market behavior changes.

• Solution: Understand that market conditions are always changing. Use Anchored VWAP as a tool among others and avoid relying on it exclusively. Regularly review and adjust your strategy based on current market conditions and other indicators.

2. Forgetting to Re-anchor VWAP

• Mistake: Traders sometimes forget to re-anchor their VWAP on a new month, week, or specific timeframes they are monitoring, such as a rolling 3-week period.

• Solution: Make it a habit to update your Anchored VWAP regularly according to your trading timeframe. Utilize custom-developed user indicators in TradingView that can automatically adjust for rolling periods, ensuring your VWAP is always relevant and up-to-date.

3. Not Realizing the Volatility Near the Anchor Point

• Mistake: Traders might not recognize that the closer they are to the anchor point, the more volatile and less reliable the VWAP will be. This can lead to misjudging the strength of support and resistance levels.

• Solution: Be mindful of the time since the anchor point. For traditional VWAP, it’s more reliable after the opening rush. For Anchored VWAP extending over multiple days, ensure there’s sufficient volume and data to establish a reliable reference point. Use common sense and avoid making trading decisions based solely on VWAP when near the anchor point.

4. Ignoring Market Context

• Mistake: Focusing solely on Anchored VWAP without considering the broader market context, such as overall trends, news, and other technical indicators.

• Solution: Integrate Anchored VWAP with other technical and fundamental analyses. Always consider the broader market context and how various factors may impact the effectiveness of VWAP as a support or resistance level.

Catching these common mistakes can help you use the Anchored VWAP more effectively while avoiding unnecessary losses.

The Bottom Line

The Anchored VWAP can be a powerful tool for traders, providing precise market insights by allowing custom anchor points. But be cautious—common mistakes like the four mentioned above can lead to poor trading performance; so, be mindful of the context and how you’re using the indicator.

Combining it with other indicators and regularly updating your anchor points can help you harness the full spectrum of the Anchored VWAP’s potential. Like every technical indicator, it takes experience and tweaking to get the most out of this tool in a way that works for your trading style. So, good luck and happy trading!

Trading Futures and Options involves substantial risk of loss and is not suitable for all investors. Past performance is not necessarily indicative of future results.

The article on Fair Value Gaps is the opinion of Optimus Futures, LLC.

• Fair Value Gaps (FVGs) are price jumps due to imbalanced buying and selling pressures, viewed by traders as opportunities amidst market uncertainty.
• FVGs can be spotted on charts as large candles not fully overlapped by the wicks of neighboring ones, differing from small gaps that don’t show significant buying/selling imbalances.
• Trading strategies for FVGs involve buying/shorting the gap, using FVGs as support/resistance levels, and implementing various indicators and stop losses.

What Are Fair Value Gaps?

A Fair Value Gap (FVG) as it’s often referred to, is basically a gap that forms when the buying and selling forces are wildly out of balance.

What causes this mismatch? Well, it could be a ton of things – a major news event, the release of certain economic data, or even hefty trades by big institutions. Does that make sense?

Let’s talk about how price action traders view Fair Value Gaps or FVGs. They often see these as chances to jump into the market, banking on the likelihood that the market will swing back to cover the gap before it carries on in the direction it was originally heading.

But here’s a word of caution – FVGs can sometimes act like pitfalls. There might be instances where the market doesn’t fill the gap and instead continues on its original path.

ALSO READ | How to Trade Price Gaps

But What Does “Fair Value” Even Mean? Good question. To really get how FVGs form, it helps to understand the idea of ‘fair value.’

Now, fair value is the price point where a security would be trading if the buying and selling forces were perfectly balanced. But when there’s an imbalance, that’s when the market price begins to drift away from this fair value.

In an FVG scenario, the market price will create a gap, either upward or downward, to a level that’s closer to the fair value.

Why does this happen? It’s because the imbalance in buying and selling pressures will eventually find a way to correct itself.

What Do FVGs Tell You?

FVGs indicate that there is a significant imbalance in buying and selling pressure. This imbalance can be caused by a number of factors, such as:

• News events: If there is a major news event that causes a sudden change in market sentiment, this can lead to an FVG. For example, if there is a surprise interest rate hike, this could cause the market to gap down.
• Economic data releases: Similarly, if there is a major economic data release that causes a sudden change in market sentiment, this could lead to an FVG. For example, if GDP growth is lower than expected, this could cause the market to gap down.
• Large institutional trades: Large institutional trades can also lead to FVGs. For example, if a large hedge fund is buying a large number of shares of a stock, this could cause the market to gap up.

This kind of uncertain environment can actually pave the way for opportunities for traders, particularly those who rely heavily on price action.

But like everything else in trading, it’s crucial to keep in mind the risks involved. You know what they say, right? “No risk, no reward”, but always be mindful of that risk part.

How To Identify Fair Value Gaps Gaps (and what are not FVGs)

FVGs can be identified on a chart by looking for a large candle whose neighboring candles’ upper and lower wicks do not fully overlap the large candle.

The space between the wicks of the neighboring candles is the FVG.

FVG

It is important to note that not all gaps are FVGs. For example, if there is a gap between two candles that are both very small, this is not an FVG.

This is because the imbalance in buying and selling pressure is not significant enough to create an FVG.

Not an FVG

Here are some of the key characteristics of FVGs:

• They are created by a significant imbalance in buying and selling pressure.
• They are often large gaps, spanning multiple candles.
• They can be found on all time frames, but they are most commonly seen on daily and weekly charts.
• They can be filled or not filled.

Basically, you’re on the lookout for a large candle on a chart that’s not fully covered by the wicks of its neighboring candles – that space in between is your FVG.

Remember, not every gap is an FVG. For instance, a gap between two tiny candles isn’t one, because the buying and selling imbalance isn’t enough to make an FVG.

Key things to remember about FVGs:

• they’re formed by a significant buying and selling imbalance,
• they’re usually big spanning multiple candles, they’re found on any time frame (though mostly on daily and weekly charts), and
• they can either be filled or remain unfilled.

Strategies for Trading Fair Value Gaps

There are a number of different strategies that can be used to trade FVGs. Some common strategies include:

Buying the gap: This is the most common strategy for trading FVGs. The idea is to buy the market at the price level of the gap, and then sell it once the market retraces back to the gap.

ES – 1-hour chart 7.7 to 7.13.23.

In this example, a trader could have used multiple exit strategies to take profits.

Shorter term traders might have taken a measured move approach, waiting for the position to reach a certain percentage of the amount risked (e.g. 2-to-1 reward/riask), Longer term traders might be aiming at the 4630.00 (March 2022) high.

Shorting the gap: This strategy is less common, but it can be profitable if done correctly.

The idea is to short the market at the price level of the gap, and then cover the short once the market retraces back to the gap.

GC Daily Chart 4.11 to 7.4.23. Chart illustrates the FVG, retest, and profit target using the measured move method.

Using FVGs as support or resistance: FVGs can also be used as support or resistance levels.

For example, if a market gaps up and then retraces back to the gap level, this level can often act as support in the future.

Additional Tips for Trading FVGs

• Use a combination of indicators: It is often helpful to use a combination of indicators to trade Fair Value Gaps. This will help to confirm the trade and reduce the risk of false signals.
• Use stop losses: It is important to use stop losses when trading Fair Value Gaps. This will help to protect your profits and limit your losses.
• Wait for confirmation: Before entering a trade, it is important to wait for confirmation that the market is actually going to retrace back to the gap. This can be done by looking for a bullish or bearish reversal candle at the gap level.
• Be patient: Trading Fair Value Gaps can be a patient game. It is important to be patient and wait for the right trade before entering.

The Bottom Line

Fair Value Gaps (FVGs) are price jumps that happen when buying and selling pressures are not balanced, caused by things like big news, economic data releases, or large institutional trades.

Traders see these gaps as a sign of market uncertainty and potential opportunities.

However, they can also be risky, as the market might not always cover the gap. You can spot FVGs on a chart as large candles not fully overlapped by the wicks of their neighbors.

Not all gaps are FVGs; small gaps, for example, do not signal a significant buying and selling imbalance.

When trading FVGs, common strategies include buying or shorting the gap, and using FVGs as support or resistance levels.

It’s also advised to use a mix of indicators, stop losses, wait for confirmation, and be patient when trading FVGs. Understanding these can help you navigate the market better, but always consider the risks.

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.