Indicator Insights Part 1: Using VWAP to Time Pullbacks
In this 5-Part series, we'll unlock the potential of various indicators and their applications, starting with the dynamic and versatile VWAP (Volume Weighted Average Price).
We’ll give you a simple 3-step method that uses VWAP to time your entry into emerging trends and run through plenty of worked examples. But before we get into the juicy bit, let’s start with the basics…
Understanding Pullbacks
Pullbacks, those brief retracements within an ongoing trend, present an opportunity for traders to enter positions at favourable prices before the trend resumes its journey.
Pullbacks
Past performance is not a reliable indicator of future results
Spotting pullbacks is relatively straightforward, but mastering the art of timing entries is the real challenge, and this is where VWAP shines…
What is VWAP and Anchored VWAP
VWAP is used to measure the average price a security has traded at throughout the day, based on both volume and price. It's calculated by multiplying the volume traded at each price level by the price, then dividing the sum by the total volume for the trading day.
Anchored VWAP is a variant of the VWAP indicator that allows traders to set a specific starting point for the VWAP calculation. This starting point can be a particular date, time, or significant event, providing a customised reference point for analysing price movements.
VWAP and Anchored VWAP
Past performance is not a reliable indicator of future results
Adding Anchored VWAP to Your Chart
TradingView make using the Anchored VWAP very straightforward. Simply select Anchored VWAP from the list of Volume-Based measuring tools found on the left-hand side of your TradingView Superchart.
A seamless point-and-click process enables the integration of Anchored VWAP, providing traders with a tailored reference point for timing pullbacks.
Adding Anchored VWAP
Past performance is not a reliable indicator of future results
3 Steps to Using Anchored VWAP to Time Pullbacks
1. Identify the momentum move which breaks structure: On your trading timeframe of choice, look for a clean swing of directional price action that has enough momentum to have broken and held above a horizontal support / resistance level or trendline.
2. Anchor the VWAP: Anchor your VWAP to the origin of the momentum move identified in step 1. You are then looking for price to pull back to your anchored VWAP.
3. Price Action Confirmation: Once price has pulled back to your anchored VWAP added in step 2, wait for price action to show signs of reversing in the direction of the momentum move identified in step 1. Having the discipline to wait for price action confirmation will help to reduce false signals.
Worked Examples
The following worked examples show the versatility of the anchored VWAP indicator in timing pullbacks. It can be used across any timeframe in any market.
Example 1: GBP/USD Hourly Candle Chart
Past performance is not a reliable indicator of future results
Example 2: EUR/USD 5min Candle Chart
Past performance is not a reliable indicator of future results
Example 3: Tesla (TSLA) 1hr Candle Chart
Past performance is not a reliable indicator of future results
Summary:
Pullbacks offer the chance to enter trends at favourable levels of risk/reward. Placing an anchored VWAP at the origin of the last momentum move offers helpful guidance as to the level in which the pullback may reverse. Remember to be patient enough to wait for price action confirmation before entering pullback trades.
Disclaimer: This is for information and learning purposes only. The information provided does not constitute investment advice nor take into account the individual financial circumstances or objectives of any investor. Any information that may be provided relating to past performance is not a reliable indicator of future results or performance. Social media channels are not relevant for UK residents.
Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money.
We’ll give you a simple 3-step method that uses VWAP to time your entry into emerging trends and run through plenty of worked examples. But before we get into the juicy bit, let’s start with the basics…
Understanding Pullbacks
Pullbacks, those brief retracements within an ongoing trend, present an opportunity for traders to enter positions at favourable prices before the trend resumes its journey.
Pullbacks
Past performance is not a reliable indicator of future results
Spotting pullbacks is relatively straightforward, but mastering the art of timing entries is the real challenge, and this is where VWAP shines…
What is VWAP and Anchored VWAP
VWAP is used to measure the average price a security has traded at throughout the day, based on both volume and price. It's calculated by multiplying the volume traded at each price level by the price, then dividing the sum by the total volume for the trading day.
Anchored VWAP is a variant of the VWAP indicator that allows traders to set a specific starting point for the VWAP calculation. This starting point can be a particular date, time, or significant event, providing a customised reference point for analysing price movements.
VWAP and Anchored VWAP
Past performance is not a reliable indicator of future results
Adding Anchored VWAP to Your Chart
TradingView make using the Anchored VWAP very straightforward. Simply select Anchored VWAP from the list of Volume-Based measuring tools found on the left-hand side of your TradingView Superchart.
A seamless point-and-click process enables the integration of Anchored VWAP, providing traders with a tailored reference point for timing pullbacks.
Adding Anchored VWAP
Past performance is not a reliable indicator of future results
3 Steps to Using Anchored VWAP to Time Pullbacks
1. Identify the momentum move which breaks structure: On your trading timeframe of choice, look for a clean swing of directional price action that has enough momentum to have broken and held above a horizontal support / resistance level or trendline.
2. Anchor the VWAP: Anchor your VWAP to the origin of the momentum move identified in step 1. You are then looking for price to pull back to your anchored VWAP.
3. Price Action Confirmation: Once price has pulled back to your anchored VWAP added in step 2, wait for price action to show signs of reversing in the direction of the momentum move identified in step 1. Having the discipline to wait for price action confirmation will help to reduce false signals.
Worked Examples
The following worked examples show the versatility of the anchored VWAP indicator in timing pullbacks. It can be used across any timeframe in any market.
Example 1: GBP/USD Hourly Candle Chart
Past performance is not a reliable indicator of future results
Example 2: EUR/USD 5min Candle Chart
Past performance is not a reliable indicator of future results
Example 3: Tesla (TSLA) 1hr Candle Chart
Past performance is not a reliable indicator of future results
Summary:
Pullbacks offer the chance to enter trends at favourable levels of risk/reward. Placing an anchored VWAP at the origin of the last momentum move offers helpful guidance as to the level in which the pullback may reverse. Remember to be patient enough to wait for price action confirmation before entering pullback trades.
Disclaimer: This is for information and learning purposes only. The information provided does not constitute investment advice nor take into account the individual financial circumstances or objectives of any investor. Any information that may be provided relating to past performance is not a reliable indicator of future results or performance. Social media channels are not relevant for UK residents.
Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money.
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