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The Volume Weighted Average Price (VWAP) is one of the most widely used indicators in financial markets to analyse price in relation to trading volume. Its main function is to provide an objective measure of the weighted average price, which is useful for assessing the balance between supply and demand and for comparing the quality of executions relative to the market.
Created with the spread of the first electronic trading systems in the 1980s, VWAP was quickly adopted by banks, funds and institutional desks as an operational benchmark. A price above VWAP indicates upward pressure, while lower prices signal a prevalence of supply. For this reason, VWAP is used both as a reference for order execution and as a directional filter and signal generator in quantitative systems.
A conceptual evolution of this indicator is the Anchored VWAP (AVWAP). Unlike traditional VWAP, which resets to zero at each new session, AVWAP allows the calculation to be anchored to a specific point in time: a significant high or low, a breakout, a macro event or a structural discontinuity in the market. In this way, the weighted average price remains valid as long as the chosen anchor retains its informational relevance.
For many traders, the real sticking point is not understanding what AVWAP represents, but how to exploit the information it provides in an operational manner. The choice of anchor point introduces a high degree of discretion: different anchors can produce opposing readings of the same market context, making objective and repeatable assessment difficult.
In this post, we will address the issue from a quantitative perspective. Using only Open, High, Low and Close (OHLC) data, we will construct a systematic anchoring methodology designed to reduce discretion and make AVWAP testable and replicable.
Below, we will analyse:
- possible applications of AVWAP in directional market contexts;
- methods of use in environments favourable to a mean reverting approach;
- we will dedicate a specific section to the use of the indicator as a support in the search for a more efficient entry point.
The objective is to integrate AVWAP into a structured decision-making process, consistent with different operational hypotheses but united by a quantitative approach.
A unified space for all resources, a single framework for every trader.