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UNLOCKING THE POWER OF DEVIATION BANDS: ARE YOU MISSING OUT?

Garrett Baldwin

 

Good afternoon,

 

Even from 30,000 feet high, soaring somewhere above France, the early session
dip and rip off the 2nd deviation band on the S&P 500 (SPY) is hard to overlook.
Although I can't go live for today's session, it doesn't impede us from
revisiting an essential trading tool. So, let's take a moment to revisit how to
set up deviation bands on TradingView.

 



First, you need to visit the website TradingView.com and sign in. Once you've
signed up and signed in, navigate to a stock ticker like the S&P 500 ETF (SPY)
and go to a more advanced chart set to one-minute intervals and ensure that your
chart type is set to 'candles'.


Next, you'll have to set your indicators. Specifically, you need the 'volume
weighted average price' (VWAP). Upon setting this indicator you’ll see one
standard deviation band and a blue line, which represents your VWAP.  

 



The app will display a range of options, but you need to edit this indicator. To
do this, click on the small widget next to the numbers that indicate the range
of the bid and ask and navigate to settings. This will reveal three 'band'
inputs. Click on all of them to activate them.

 



After setting up these bands, you can use them to guide your trading decisions.
For instance, some prefer to trade around the second standard deviation band,
especially when momentum is positive. This band typically attracts a lot of
activity and can lead to sharp reversals.

 



If it dips down to the third band, that's typically where a trend reversal has
been observed in recent months. This would be a point to consider trading an
in-the-money or slightly out-of-the-money call. 


You can also consider trading around the volume weighted average price (VWAP),
which often acts like a magnet for prices. If the price breaks under the VWAP,
you may consider selling to minimize losses.


But it's important to remember that while these bands can be helpful, they don't
guarantee success. You need to closely monitor momentum and react accordingly.
The market is not always rational, and there can be surprising movements even
within these deviation bands. For instance, sometimes the price can hug the
third deviation line all the way up before reversing. Other times, in a negative
momentum environment, there can be large sell-offs that only reverse in the last
hour of the day, due to short covering or dip buying as most traders see this as
an opportunity for entry.


In the end, understanding and using these deviation bands are just one tool in
our trading arsenal, it's always important to track momentum and use your best
judgment when entering and exiting a position. You can click here to watch the
full clip for better instruction on setting up your deviation bands. 

 

Talk Soon,


Garrett

 





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