Maximum Trading Gains: Unlocking the Power of Anchored VWAP

Mastering Brian Shannon's AVWAP Strategy for Superior Stock Selection and Timing

Welcome back to Momentum Alpha, where today we dive into Brian Shannon’s latest book, "Maximum Trading Gains with Anchored VWAP." Shannon, the founder of Alphatrends.net and author of "Technical Analysis Using Multiple Timeframes," shares invaluable insights from his 30-year trading journey. Let's explore how his innovative use of Anchored VWAP (AVWAP) can transform your trading strategy.

Brian Shannon’s Trading Journey

Brian Shannon began his trading career as a teenager with a $500 newspaper route savings, supplemented by a $4,500 gift from his father. His early success led to a full-time career in trading and eventually to founding Alphatrends.net. During his tenure as head of proprietary trading at Market Wise Securities, Shannon developed the AVWAP tool, which has since become a cornerstone of his trading strategy.

Understanding VWAP and AVWAP

The Volume Weighted Average Price (VWAP) is a widely-used indicator that represents the cumulative average price of a stock based on volume. Unlike a simple moving average, VWAP gives more weight to prices with higher volumes. The Anchored VWAP (AVWAP) takes this a step further by allowing traders to set a specific starting point (anchor) on the chart, shedding irrelevant data and focusing on significant price action.

For example, if you’re tracking a stock that has experienced a significant change in fundamentals, anchoring the VWAP at the start of this change can provide a clearer picture of current trends and institutional interest.

Key Components of AVWAP: Price, Volume, and Time

The effectiveness of AVWAP hinges on three components:

1. Price: The current price action.

2. Volume: The volume of trades, which is crucial as institutions dominate market movements.

3. Time: Different time frames offer different perspectives. Long-term trends might show an uptrend, while short-term frames could indicate a downtrend.

Shannon's strategy involves analyzing long-term charts to determine money flows, planning trades on intermediate-term charts, and fine-tuning entries and exits on short-term charts.

Using AVWAP for Trading

AVWAP can be a powerful tool for stock selection, timing entries, risk management, and exit strategies. Here are some key applications:

1. Identifying Hidden Support and Resistance: Unlike conventional static support and resistance levels, AVWAP levels are dynamic, adjusting with each trade. These levels are critical in trending markets where prices move quickly without forming clear support/resistance zones. For example, an AVWAP anchored at a recent high in Apple Inc. might act as a dynamic resistance that, once breached, turns into support.

   

2. Setting the Anchor: Anchors can be set at various significant points, such as high-volume events, fundamental announcements, or price-based events like swing highs and lows. For instance, an AVWAP anchored at a high-volume up day in Zoom Inc. could highlight a strong support level tested multiple times as the stock continues its ascent.

   

3. Handoff and Pinch Strategies:

   • Handoff: This technique involves setting a new anchor when a trend accelerates, providing new entry points. For example, after anchoring at a swing low, a new anchor is set at the next support level as the trend picks up speed.

   • Pinch: This strategy uses two AVWAPs to identify consolidation areas. When the stock breaks out from this area, it can be traded in the direction of the dominant trend.

4. Trading Gaps: AVWAP can help trade different types of gaps (breakaway, continuation, exhaustion) by providing entry points when prices retest the AVWAP anchored at the gap.

5. Trading IPOs: AVWAP is particularly useful for IPOs, providing reliable entry points post-listing. Anchoring the AVWAP to the second candle of the day, rather than the first, can offer better insights due to high initial volumes.

   

6. Comparing Entry Points: AVWAP helps in identifying low-risk entry points compared to traditional methods. For example, in a downtrend, entering a short trade when the price closes below the AVWAP offers a safer entry than guessing the bounce or waiting for a breakdown.

Conclusion

Brian Shannon’s dedication to AVWAP has highlighted its versatility and effectiveness in trading. Whether you're new to trading or an experienced trader looking for a powerful strategy, Shannon’s book provides a comprehensive guide to mastering AVWAP.

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