Connected VWAPThe linked VWAP indicator links the VWAP calculations to a specific price bar chosen by the trader. Like the traditional VWAP, it combines price and volume with a weighted average and can be used to identify support and resistance areas on the chart.
However, traditional VWAP calculations always start with the first bar of the day and end with the last bar of the day. In some cases, a graphics specialist may choose to analyze the VWAP line against a less arbitrary starting point and extend this VWAP line beyond the end of the trading day.
The linked VWAP allows you to determine the price bar where calculations begin, making it easy to see if bulls or bears are responsible from a very specific point in time. The starting price bar selected generally indicates a change in market psychology, such as a significant high or low gain, news or other announcements. The connected VWAP line is plotted using price and volume data after this major event.
Check out our Anchored forex signals VWAP dive video featuring Brian Shannon from Alphatrends or read on to learn more about this technical layer.
Like traditional VWAP, Connected VWAP overlay can be used to validate trends and identify areas of support and resistance on the chart. The advantage of using linked VWAP is that you can set the starting point to include only relevant data in your chart.
Typically, the chartplotter chooses a specific event as the starting price bar for the skin: a significant high or low, a earnings announcement, a gap, etc. These events usually indicate a change in market psychology and the price action before this change. Since it does not reflect the same market psychology, it should be excluded from the calculations.
For example, in the TSLA forex trading signals chart below, the VWAP line (in blue) is based on the opening bar, while the Connected VWAP line (red) is set at the lowest level of the morning. The blue VWAP line includes data on the sharp rise in the first 20 minutes of the transaction as well as the massive drop to the low of the day, creating a VWAP line that does not reflect the midday price action. The Red Linked VWAP line contains only data since it reached its lowest level and more accurately reflects the midday market psychology.
The multi-linked VWAP https://www.freeforex-signals.com/ line can be used in a single chart, each pinned to a different starting point. Where multiple Linked VWAP lines meet, this can indicate a particularly strong area of support or resistance.
Connected VWAP provides all the same benefits of traditional VWAP in defining support and resistance levels, while also providing the advantage of being able to pinpoint the exact time frame to operate. Starting VWAP calculations at the moment of a significant turning point allows you to exclude price action driven by a different market psychology.
As with all technical indicators, traders should use the Anchored VWAP overlay along with other indicators and analysis techniques.