Candlesticks + Anchored VWAP: Who Is Ahead

VWAP stands for volume-weighted average price: the average price paid per share over some stretch of trading, where a day with more shares traded counts for more. Most charting platforms offer two versions, and they answer different questions.

Session VWAP restarts every trading day. It is a day trader’s tool: the average price paid so far today. On a daily chart it collapses to one value per day, so it says nothing about the weeks behind a swing trade.

Anchored VWAP starts on a day you choose, called the anchor, and keeps running from there. Brian Shannon, a technical analyst, popularized it and wrote a book on it, Maximum Trading Gains With Anchored VWAP. It answers one question:

Since that day, what is the average price the buyers paid, and are they ahead or behind?

Every share that changes hands has a buyer. If price is above the line, the average buyer since the anchor is sitting on a gain. If price is below it, the average buyer is sitting on a loss. Traders watch the line because people who are ahead tend to hold or add, and people who are behind are often glad to sell at break-even.

Each day gets one price, the typical price: the day’s high, low and close added together and divided by three. That price is multiplied by the day’s volume. The running total of those products, divided by the running total of volume, is the anchored VWAP:

Anchored VWAP = sum of (typical price × volume) ÷ sum of volume, from the anchor day to today

Take three days, starting from the anchor. Day 1 has a high of $50.00, a low of $47.00 and a close of $48.00: a typical price of about $48.33, on 2 million shares. The line starts at $48.33. Day 2’s typical price is $48.90, on 1 million shares. The line moves to $48.52, not halfway to $48.90, because Day 1 traded twice as many shares and counts twice as much. Day 3’s typical price is about $50.17, on 1.5 million shares, and the line reaches $49.07.

If Day 3 closed at $50.50, the average buyer since the anchor paid about $49.07 and is ahead by roughly 3%.

On a daily chart the typical price is an estimate. A true VWAP weighs every individual trade at its own price, which only intraday data can do. Platforms differ in the detail, so two charts can show slightly different values for the same anchor. It also means a line anchored at a candle starts at that day’s typical price, not at its high or low: a line anchored at a Hammer starts well above the Hammer’s low, usually near or below the bottom of its body.

The anchor is the one choice you make, and it decides what the line means. Shannon calls it the most subjective part of the method. The rule of thumb is to anchor to a day when something changed: a day price turned, or a day the market reacted to news. A swing high is the top of a rise before price turns down; a swing low is the bottom of a drop before price turns up.

Pick the clear turns a glance at the chart would find, not every small wiggle. If you need to hunt for an anchor that makes the line fit, the line is telling you nothing.

The older the anchor, the slower the line moves. After months of trading, one more day barely shifts the average, so the line flattens out. A recent anchor reacts quickly.

Price above a rising line: buyers since the anchor are ahead, the average they paid keeps climbing, and the trend favors them. Price below a falling line: the mirror image. Buyers since the anchor are behind, and the trend favors the sellers. Price crossing back and forth: neither side has the upper hand yet.

Where price meets the line, it often reacts, acting as resistance (a price where rallies tend to stall) or support (a price where falls tend to pause). A rally that rises to a line anchored above it often stalls there, because buyers from higher up can get out near break-even. A pullback to a line anchored below it often finds buyers, because the people who bought since that low defend their position. A line that held price back can later hold it up once price closes above it.

“Often” is the honest word. These are tendencies, not rules. Shannon himself describes the line as a zone to watch, not a mechanical signal. Price can cut straight through it. When it does, that is information too: the crowd the line stands for has changed its mind.

A moving average averages the last fixed number of closes, such as 50, and forgets everything older. Every day counts the same, however many shares traded. Anchored VWAP has no window: it counts every day since the anchor, and weights each by its volume.

That last row is anchored VWAP’s edge. A 50-day average starts on whatever day happens to be 50 days back. An anchored VWAP starts on a day that mattered, so the line stands for a real group of buyers.

Volume Profile asks a related question from another angle: it shows how much traded at each price, while anchored VWAP boils all of it down to one average that moves day by day.

A bullish reversal candle tells you where and when buyers pushed back after a decline. Two anchored VWAPs tell you who is ahead and who is behind around that turn. Use them in three steps:

For example, a Hammer at a new low shows buyers rejecting lower prices during the day. If the bounce that follows rises to the line from the swing high and stalls, that is not a failure. It is the place the chart says sellers were likely to show up. What matters is the pullback after it: does it hold above the line from the Hammer’s low? A later close above the line from the high means the average buyer of the whole decline is back above break-even, and their selling tends to ease.

A Bullish Engulfing that closes above the line from the swing high has already pushed the buyers of the whole fall back into profit. That is rare at a deep low, and more common after a shallow pullback. A Morning Star spreads the low over three days; anchor the second line on the day with the lowest low.

It depends on your anchor. Two traders who anchor on different days see different lines. Choose the anchor from the turn, before looking at how the line fits, or you will always find one that seems to work.

It can’t see who is still holding. The line assumes the buyers since the anchor are still in. Many will have sold along the way. It is an estimate of the crowd’s average cost, not a record of it.

It lags in fast moves. It is an average, so a sharp drop or rally runs away from it. In a fast market, price can be far from the line for a long time.

It gets less useful in a sideways market. When price chops back and forth across a flat line, the line marks the middle of the range and says little about direction. For reading a sideways market, see Candlesticks + Trading Ranges.

It can’t call the turn. A stall at the line or a hold above it says where traders reacted. It does not say whether the reversal will last. The candle and its confirmation do the timing.

Anchored VWAP doesn’t make a candlestick pattern work. It tells you whether the people who bought since a turn are ahead or behind, and so where they are likely to buy more or get out.

So when you check anchored VWAP behind a bullish reversal candle, ask one question: “Are the buyers of the decline back to break-even yet?” A close above the line from the high says yes. Price still below it says not yet. Until then, a pullback that holds above the line from the low says the buyers since the bottom are still ahead.

This is one of seventeen context guides in this series: Candlesticks + Moving Averages for trend structure, Candlesticks + RSI for how stretched a move is, Candlesticks + MACD for momentum, Candlesticks + ADX for trend strength, Candlesticks + Volume for conviction, Candlesticks + On-Balance Volume for whether volume favors up days or down days, Candlesticks + Accumulation/Distribution for where the close fell, Candlesticks + Volume Spread Analysis for reading each bar’s effort and result, Candlesticks + Volume Profile for the prices where volume traded, Candlesticks + Fibonacci for retracement levels, Candlesticks + ATR for volatility, Candlesticks + Bollinger Bands for volatility bands around an average, Candlesticks + Multi-Timeframe Analysis for the weekly trend, Candlesticks + 52-Week High/Low for where price sits in its yearly range, Candlesticks + Trend Channels for where in the trend price sits, and Candlesticks + Trading Ranges for sideways markets. New to candles? Start with the candlestick basics guide.