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The VWAP Bands strategy is a volume-weighted mean reversion and trend tool. VWAP stands for Volume Weighted Average Price, which is considered the “true” average price paid by all traders throughout the day.
How Logic Works
It plots a central VWAP line and two sets of bands (Upper and Lower) based on Standard Deviations, similar to Bollinger Bands but incorporating volume data.
- Long Entry: Triggered when the price crosses above the Lower VWAP Band. This identifies a “value” buy where the price is statistically cheap relative to the day’s volume.
- Short Entry: Triggered when the price crosses below the Upper VWAP Band. This identifies an “expensive” short opportunity where the price has overextended relative to volume.
- The Goal: To trade the market’s return to its volume-weighted equilibrium.
Key Customizable Inputs
- NumDevsUp/Dn (Default: 2): The number of standard deviations from the VWAP line.
- Reset (Default: Daily): VWAP typically resets at the start of each new trading session.
Strategic Considerations
- Institutional Benchmark: VWAP is the primary benchmark for large institutional buyers. Prices often “react” strongly when they touch these bands because large orders are often triggered at these “fair value” levels.
- Day Trading Focus: VWAP is most effective on intraday charts (1-min, 5-min, 15-min). Its significance increases as the trading day progresses and more volume data is accumulated.
