Description:
The Volume Weighted Average Price (VWAP) with Standard Deviation Bands is a technical analysis tool that combines the VWAP indicator with standard deviation bands to provide traders with insights into price volatility and potential reversal points. The VWAP is calculated by multiplying the volume traded at each price level by the corresponding price, then dividing the total by the total volume traded over a specified time period, typically the trading day. Adding standard deviation bands around the VWAP helps identify potential overbought or oversold conditions by showing where prices are statistically likely to revert to the mean. Traders often use these bands to identify potential entry and exit points, with moves outside the bands suggesting a potential shift in market sentiment or trend.
Input Parameters:
- Mult 1, 2, 3, 4: Band multipliers that dictate the levels painted by the indicator.
- Period: Determines where the VWAP will anchor too. 1D is the current day. 2D is the previous day.
- Custom(days): When the 'Custom' period is selected, this setting allows users to specify the exact number of days (between 1 and 730) for the VWAP calculation, providing flexibility for personalized analysis.
- Bands: Determines whether the standard deviation bands are calculated using the current session's VWAP or the previous session's VWAP, affecting how the bands adjust and react to price changes day-to-day.
- Price Source: The specific data points (such as open, high, low, or close) from each candle in a financial chart that an indicator uses for mathematical computations, enabling the calculation of metrics like the average over a specified period.
- Offset: The offset value is used to access the data of any candle or indicator concerning the current candle, to access the current candle data it will use the offset value of "0", to access previous candle data "-1" offset value will be used, access data of previous to previous "-2" will be used.
Use Case:
- Trend Identification: Traders can use the VWAP with Standard Deviation Bands to identify the overall trend of a security. When prices consistently trade above the VWAP and towards the upper standard deviation band, it indicates a strong uptrend, while prices consistently trading below the VWAP and towards the lower standard deviation band suggest a downtrend. This helps traders align their positions with the prevailing trend.
- Reversion to the Mean: When prices move significantly away from the VWAP and outside the standard deviation bands, it often indicates overbought or oversold conditions. Traders can use these extremes as signals for potential mean reversion trades. For example, if prices touch or breach the upper standard deviation band, traders might look for short opportunities anticipating a move back towards the VWAP.
- Confirmation of Breakouts or Breakdowns: Traders often use VWAP with Standard Deviation Bands to confirm breakouts or breakdowns from key support or resistance levels. If a security breaks above a resistance level and the VWAP is sloping upwards with prices consistently staying above it, along with the upper standard deviation band expanding, it suggests a strong bullish breakout. Conversely, if prices break below a support level accompanied by the VWAP sloping downwards and prices consistently staying below it with the lower standard deviation band expanding, it suggests a strong bearish breakdown. This confirmation can provide traders with additional confidence in their trading decisions.
This feature can be used in:
- Market Scanner
- Strategy Tester
- Dynamic Alerts
- Multi-Factor Alerts
- Smart Checklist
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