VWAP Deviation Channels with Probability (Lite)

VWAP Deviation Channels with Probability (Lite)

Version 1.2

Overview

This indicator is a powerful tool for intraday traders, designed to identify high-probability areas of support and resistance. It plots the Volume-Weighted Average Price (VWAP) as a central "value" line and then draws statistically-based deviation channels around it.
Its unique feature is a dynamic probability engine that analyzes thousands of historical price bars to calculate and display the real-time likelihood of the price touching each of these deviation levels. This provides a quantifiable edge for making trading decisions.

Core Concepts Explained

This indicator is built on three key concepts:

The VWAP (Volume-Weighted Average Price): The dotted midline of the channels is the session VWAP. Unlike a Simple Moving Average (SMA) which only considers price, the VWAP incorporates volume into its calculation. This makes it a much more significant benchmark, as it represents the true average price where the most business has been transacted during the day. It's heavily used by institutional traders, which is why price often reacts strongly to it.

Standard Deviation Channels: The channels above and below the VWAP are based on standard deviations. Standard deviation is a statistical measure of volatility.

- Wide Bands: When the channels are wide, it signifies high volatility.

- Narrow Bands: When the channels are tight and narrow, it signifies low volatility and
consolidation (a "squeeze").

The Conditional Probability Engine: This is the heart of the indicator. For every deviation level, the script displays a percentage. This percentage answers a very specific question:
"Based on thousands of previous bars, when the last candle had a certain momentum (bullish or bearish), what was the historical probability that the price would touch this specific level?"
The probabilities are calculated separately depending on whether the previous candle was green (bullish) or red (bearish). This provides a nuanced, momentum-based edge. The level with the highest probability is highlighted, acting as a "price magnet."

How to Use This Indicator

Recommended Timeframes:

This indicator is designed specifically for intraday trading. It works best on timeframes like the 1-minute, 5-minute, and 15-minute charts. It will not display correctly on daily or higher timeframes.

Recommended Trading Strategy: Mean Reversion

The primary strategy for this indicator is "Mean Reversion." The core idea is that as the price stretches to extreme levels far away from the VWAP (the "mean"), it is statistically more likely to "snap back" toward it.

Here is a step-by-step guide to trading this setup:

1. Identify the Extreme: Wait for the price to push into one of the outer deviation bands (e.g., the -2, -3, or -4 bands for a buy setup, or the +2, +3, or +4 bands for a sell setup).

2. Look for the High-Probability Zone: Pay close attention to the highlighted probability label. This is the level that has historically acted as the strongest magnet for price. A touch of this level represents a high-probability area for a potential reversal.

3. Wait for Confirmation: Do not enter a trade just because the price has touched a band. Wait for a confirmation candle that shows momentum is shifting.

- For a Buy: Look for a strong bullish candle (e.g., a green engulfing candle or a hammer/pin
bar) to form at the lower bands.
- For a Sell: Look for a strong bearish candle (e.g., a red engulfing candle or a shooting star)
to form at the upper bands.

Define Your Exit:

- Take Profit: A logical primary target for a mean reversion trade is the VWAP (midLine).

- Stop Loss: A logical place for a stop-loss is just outside the next deviation band. For
example, if you enter a long trade at the -3 band, your stop loss could be placed just
below the -4 band.

Disclaimer: This indicator is a tool for analysis and should not be considered a standalone trading system. Trading involves significant risk, and past performance is not indicative of future results. Always use this indicator in conjunction with other forms of analysis and sound risk management practices.