Standard Deviation is a statistical indicator of price volatility, measuring the dispersion of prices from the average price.
Dispersion is the difference between the actual price and the average price.
Standard deviation is also a measure of volatility.
If
the price is trading within a narrow trading range , the standard deviation will return a lower value, indicating lower volatility.
If the price trades in a wide range, moving wildly up and down, then the standard deviation will return a higher value, indicating higher volatility.
Traders use standard deviation to measure expected risk and to determine the significance of certain price movements.
Standard deviation is used as part of other indicators such as Bollinger Bands. It is often used in conjunction with other technical analysis techniques.
How to use standard deviation
Standard deviation is a way of measuring price volatility by relating a price range to its moving average.
- The higher the indicator value , the greater the spread between the price and its moving average, the greater the volatility of the instrument and the more spread out the price bars.
- The lower the value of the indicator , the smaller the spread between the price and its moving average, the less volatile the instrument is and the closer the price bars are to each other.
As prices become more volatile, the standard deviation increases. As price action calms, the standard deviation decreases.
As the standard deviation increases, price movements show above-average strength.
- Market tops and increased volatility in the short term indicate traders are nervous and indecisive.
- Market peaking and volatility declining Over the longer term, a bull market is maturing.
- Markets bottoming out and volatility declining over a long period of time is a sign that traders are bored and disinterested.
- In a relatively short period of time, as volatility increases, the market bottoms indicating panic selling.
How to calculate standard deviation
Calculate standard deviation:
- Calculate SMA for period n
- Subtract the SMA values from the first step from the closing prices of each of the past n periods and then square them
- Add the squared differences and divide by n
- Calculate the square root of the result from step 3
SD = Sqrt [(Sum the ((Close for each of the past n Periods – n Period SMA for the current bar)^2))/ n]
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