VWAP bands in gold trading

VWAP bands add standard deviation bands around the volume-weighted average price. The first band (±1 standard deviation) contains much of the session’s trading; the second and third bands mark increasingly stretched prices. The deviation is calculated from volume-weighted price differences from VWAP since the anchor point.

How it applies to gold trading

Intraday gold traders use VWAP as the session’s fair value and the bands as a map of how far price has strayed. In a balanced session, moves to the second band often revert toward VWAP. In a trending session, price can ride the first band and pullbacks to VWAP become entries. Anchoring VWAP to an event, such as the London open, the NFP release or a swing low, gives bands for that move.

As with all volume tools on spot gold, platform tick volume is an approximation. Futures volume gives a more faithful VWAP.

Worked example

Example (hypothetical numbers): the New York session VWAP is 4,012, the first band ±$6 and the second ±$12. Gold spikes to 4,025, beyond the second band at 4,024, with no news. A mean-reversion trader sells at 4,023 with a stop at 4,031 and targets VWAP at 4,012, a 1:1.4 trade.

A common mistake

Fading the second band on a trend day. If price keeps closing outside the first band, the session is trending, not stretched.

See also: VWAP, Bollinger Bands, Volume profile, Consolidation and range.

Frequently asked questions