VWAP Funnels ExplainedEuro / US DollarCAPITALCOM:EURUSDCapitalcomAnchored VWAP is normally used as a single reference point, measuring the volume-weighted average price traded since a significant event, high or low. But placing two Anchored VWAPs on the same chart can tell us something different. When VWAPs anchored to opposing swing points begin to converge, they can create what we'll call a VWAP funnel. Brent crude recently emerged from a particularly clear example, while EUR/USD is currently developing one of its own. Comparing the two gives us a useful way of understanding what these funnels can tell us, and what they can't. Building a VWAP funnel The starting point is the anchors. Rather than placing an Anchored VWAP at an arbitrary point on the chart, we want to identify two significant opposing swing points that have shaped the current market structure. One VWAP is anchored to the swing high and the other to the swing low. Brent crude provides a good recent example. The upper VWAP is anchored to the significant swing high, while the lower VWAP begins at the subsequent swing low. As new trading takes place, the influence of the prices traded immediately around those extremes gradually diminishes. The upper VWAP begins to fall and the lower VWAP begins to rise, causing the distance between them to narrow. The result is the funnel. Brent crude daily candle chart Past performance is not a reliable indicator of future results The important point is that the two lines aren't simply creating another version of a triangle pattern. Each is tracking the volume-weighted average price traded since a different point in the market's recent history. The falling VWAP shows how the average price since the swing high has moved lower, while the rising VWAP shows how the average price since the swing low has moved higher. As those two reference points converge, the market is narrowing the gap between two very different starting points. This gives us another way of viewing compression. Instead of looking only at the shape created by price, we can see the average prices measured from two opposing points gradually moving closer together. The breakout isn't just about VWAP Brent provides a useful example of what happens when a VWAP funnel eventually resolves. After spending time between the two converging Anchored VWAPs, price moved above the falling upper VWAP before also clearing a nearby swing high. The move then began to follow through. There is an important distinction here. A move through one side of a VWAP funnel shouldn't automatically be treated as confirmation that the compression has been resolved. Price can move backwards and forwards across VWAP, particularly while the market remains balanced. What made the Brent move more significant was that the move through the upper VWAP was accompanied by a break of horizontal market structure and subsequent follow-through. The VWAPs provided context. Price action provided the evidence that the balance was beginning to shift. Before the answer is known EUR/USD gives us the other side of the process because its current funnel remains unresolved. On the four-hour chart, an Anchored VWAP from the August swing high is declining, while another anchored to the subsequent swing low is rising. Price is currently trading between the two as the distance separating them continues to narrow. EUR/USD four-hour candle chart Past performance is not a reliable indicator of future results This is where it is important not to turn the funnel into a prediction. The convergence of the two VWAPs tells us that price is becoming increasingly compressed between the volume-weighted average prices measured from two opposing points. It doesn't tell us which side will ultimately win. A brief move through either VWAP could simply see price return to the funnel. Instead of trying to anticipate the direction, we can watch what happens if price begins to move beyond one of its boundaries. Does price simply cross the VWAP before returning inside? Can it begin to hold outside the funnel? Does momentum expand as the move develops? And does the move begin to alter the surrounding price structure? Those questions help distinguish a simple VWAP cross from a more meaningful change in market behaviour. Context rather than prediction VWAP funnels are useful because they bring two perspectives together. A single Anchored VWAP tells us how price is behaving relative to the volume-weighted average since one important point. Using opposing anchors allows us to see what happens as those two reference prices converge. But the funnel shouldn't replace market structure or price action. Nor should every move through one of its boundaries be treated as the beginning of a new trend. Brent shows what can happen when price escapes a funnel and the move is subsequently supported by a break of structure and continued follow-through. EUR/USD currently gives us the other side of the lesson, with the compression still unresolved. That is arguably the more useful stage to study in real time. We don't need to predict which side of the funnel will give way. We can identify the compression in advance and then let price show us whether the balance is actually beginning to shift. Disclaimer: This is for information and learning purposes only. The information provided does not constitute investment advice nor take into account the individual financial circumstances or objectives of any investor. Any information that may be provided relating to past performance is not a reliable indicator of future results or performance. Social media channels are not relevant for UK residents. 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