VWAP Divergence

The VWAP Divergence indicator identifies potential trend reversals by detecting discrepancies between price action and Volume Weighted Average Price (VWAP) movements filtered by volatility.

Usage

The indicator can be used to spot exhaustion in current trends where the price continues to move in one direction while the VWAP begins to trend in the opposite direction.

• Bullish Divergence: A green dot appears below the price bar when the price moves higher while the VWAP value decreases. This suggests underlying strength despite the VWAP trend.
• Bearish Divergence: A red dot appears above the price bar when the price moves lower while the VWAP value increases. This suggests underlying weakness despite the VWAP trend.

Users can adjust the Anchor Period to align the VWAP calculation with specific timeframes or corporate events, ensuring the signals are relevant to their specific trading horizon.

Details

The script calculates the VWAP based on a user-defined anchor (ranging from standard timeframes like "Session" or "Week" to event-based anchors like "Earnings" or "Dividends").

To ensure signal quality, the indicator employs several filters:

1. ATR Filter: Only price moves that exceed a certain multiple of the Average True Range (ATR) are considered significant enough to trigger a divergence.
2. Gap Check: The script automatically invalidates signals if a large price gap occurs within the lookback window, preventing false signals caused by overnight volatility or data anomalies.
3. Proximity Filter: A logic-based cooldown period ensures that signals are not clustered too closely together, providing clearer entry or exit zones.

Settings

VWAP Settings

• Anchor Period: Determines when the VWAP calculation resets (e.g., Daily, Weekly, or Corporate Events).
• Source: The price data used for calculation (Default: HLC3).
• Offset: Shifts the VWAP plot forward or backward on the chart.

Divergence Settings

• Lookback Period: The number of bars used to compare price movement against VWAP movement.
• ATR Multiplier: A sensitivity threshold that defines how large a price move must be relative to current volatility to qualify as a divergence.

Visual Settings

• VWAP Down Color: The color of the VWAP line and dots during bearish conditions.
• VWAP Up Color: The color of the VWAP line and dots during bullish conditions.

FAQ

How do I interpret the divergence dots?

A green dot below the price suggests a potential bullish reversal or continuation strength, while a red dot above the price suggests potential bearish exhaustion or weakness.

Can I use this for long-term investing?

Yes, by changing the Anchor Period to "Year", "Decade", or "Century", the indicator can provide macro-level VWAP insights suitable for long-term analysis.

How do I access VWAP Divergence?

You can get access on the LuxAlgo Library for charting platforms like TradingView, MetaTrader (MT4/MT5), and NinjaTrader for free.