From the Desk of Louis Sykes @haumicharts
In the arsenal of every trader and technical analyst lies a countless number of indicators, metrics, and tools.
Everyone in the business is aware of the classic indicators: moving averages, Fibonacci extensions, momentum oscillators… the list goes on.
Perhaps one of the most valuable tools is the AVWAP. This is merely a representation of the average price by volume anchored to a specific time.
The AVWAP works because it takes advantage of human psychology. It’s universally accepted within the scientific community that humans are driven by a slew of biases. Ask any trader, and they’ll attest.
An incredibly common heuristic that drives much of the financial industry is the age-old anchoring bias. Many traders irrationally make decisions solely based on the price they paid for a stock.
In this sense, the market is driven by these participants responding to supply/demand dynamics within the context of their personal anchoring.
The implications of such indicators are that they allow us to gauge an aggregate cost basis of specific securities, ETFs, and financial instruments anchored to a specified date.
As a result, we can understand where the breakeven points lie for traders and investors as a collective.
This insight allows us to use AVWAPs in support/resistance trading, as well as to exploit weaknesses when investors are underwater.
In essence, a VWAP is the average price of a stock weighted by the total trading volume. The VWAP is used to calculate the average price of a stock over a period of time.
It’s calculated by multiplying typical price by volume and then dividing by total volume.
An AVWAP, meanwhile, anchors the beginning of the VWAP calculation to a specific date.
For greater detail on the AVWAP, this is a great resource.
But, when we apply this to the world of digital assets and cryptocurrencies, it becomes a more complicated practice.