What it is and how to use it
What is it?
Standard Deviation is a statistical measure that quantifies the dispersion of a set of data points around their mean. In trading, it is used to measure the volatility of a security by calculating how much the price deviates from its average over a specified period. Higher standard deviation values indicate greater price volatility, while lower values suggest more stable prices.
Who made it?
Standard Deviation is a fundamental statistics concept, developed by Karl Pearson in the late 19th century. While it is not specific to finance, it has been widely adopted in trading and risk management.
How is it calculated?
The formula for Standard Deviation (SD) is:
SD = sqrt((1/N) * sum((P_i - μ)^2))
Where:
N is the number of periods.
P_i is the price of the asset at each period.
μ is the mean (average) price over the periods.
Code (ProRealTime)
How do you use it?
Standard Deviation can be used in several ways:
Volatility Measurement:
Use Standard Deviation to identify periods of high and low volatility. Higher standard deviation values indicate higher volatility, which can signal potential breakout opportunities or riskier market conditions. Conversely, lower values suggest a stable market with less price fluctuation.
Risk Management:
It helps you set stop-loss levels and position sizes based on market volatility.
Trend Analysis:
Combining standard deviation with other indicators, such as Bollinger Bands, helps you identify overbought and oversold conditions.
FAQ
Q: What are the best settings for Standard Deviation?
A: The default setting for Standard Deviation is typically 20 periods. You can adjust this based on your trading strategy and the asset you're analyzing.
Q: How does Standard Deviation compare to ATR?
A: Both Standard Deviation and ATR measure volatility, but they do it differently. Standard Deviation looks at the dispersion of price data, while ATR focuses on the range between high and low prices.
Q: Can Standard Deviation be used alone to make trading decisions?
A: While Standard Deviation gives a good sense of market volatility, it's usually best to combine it with other indicators to confirm signals and make more informed trading decisions.
Strategies using standard deviation
None so far.
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