VWAP Bands: standard deviation channels around the session average

What it measures

VWAP bands place lines a number of standard deviations above and below VWAP, where the deviation is measured on the volume weighted distribution of trading rather than on closes.

That makes them a statement about execution: the bands describe where the session trading has clustered relative to the average fill.

They are the closest thing on a chart to a picture of where the session value is, and they reset with the session.

How it is calculated

These are the steps Basis performs, verified against the published definition.

1. 1

   Accumulate volume weighted price and volume from the session anchor to get VWAP.

2. 2

   Accumulate the volume weighted squared deviation of price from that VWAP over the same range.

3. 3

   Take the square root to get the volume weighted standard deviation.

4. 4

   Place bands at VWAP plus and minus multiples of it.

Settings

One, two and three standard deviations is conventional. The anchor matters far more: a daily anchor answers a different question from one placed at a swing low, and both are legitimate.

How to read it

• Price at the first band is roughly one standard deviation of session trading away from the average fill, which is ordinary.
• Price outside the second band means the session has moved somewhere very little volume has traded, which either reverts or marks a genuine repricing.
• The bands widening through the session means the market is finding no agreement on value.
• Bands are narrowest around the anchor and widen naturally as the session progresses, which is a property of the accumulation rather than a signal.
• Institutional execution is frequently benchmarked against VWAP, which gives the bands a genuine reason to act as support and resistance rather than a self-fulfilling one: someone is being measured on filling inside them.

Where it misleads

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