Lesson 5
Use deviation bands as context
Understand what a VWAP band measures and why a touch is not an automatic fade.
Study time: about 8m
Lesson
VWAP deviation bands place a dispersion measure around an anchored average. Implementations differ in weighting and variance calculation, so record the exact indicator settings and volume source. Changing the session anchor can change both the centre and the bands.
A standard-deviation band is not the same as a volume-profile value area. Nor does a one-standard-deviation band promise that a fixed share of future prices will remain inside it. Market returns are not obliged to follow a convenient normal distribution, and the bands themselves evolve.
In a rotational session, a return from an outer area toward the average may be a scenario to study. In a directional session, price can remain near an outer band or keep extending beyond it. First describe the session; then define a trigger and invalidation. Do not fade a strong move simply because it looks far from VWAP.
Worked example
In hypothetical session A, price repeatedly crosses a nearly flat VWAP. In B, VWAP slopes upward and pullbacks hold above it. The same upper-band touch occurs in both. A rule that blindly sells each touch ignores the difference and still has no defined exit or position size.
Try it in replay
Annotate one rotational and one directional replay session using identical band settings. For each, describe what would invalidate a mean-reversion idea and what would invalidate a continuation idea.
Check your reasoning
The answers should name price behaviour and risk conditions, not just a band number. If you cannot identify the volume source or calculation, do not compare its values with a different platform as though they were identical.