Gap Type

Presentation Gap Type:

The standard deviation is a tool widely used for statistics. This indicator measures the volatility of a security.
The standard deviation is generally used for the construction of other indicators (eg Bollinger Bands).

A higher standard deviation indicates that the data are scattered and therefore there is significant volatility. It shows generally a feeling of euphoria or fear in the markets. Conversely, a low standard deviation indicates a low volatility and good anticipation of investors (no surprise).
Formula explanation:

More courses away from their mean is to say, the greater the difference between current and average increases, the volatility is high.
The standard deviation is the square root of the variance. The variance is calculated by averaging the deviations from the mean, all squared.

The calculation can be broken down into 6 steps:

1. It calculates a simple moving average (MMS)
2. For each period, the difference between the closing and the MMS determined in step 1
3. It is squared all the results obtained in step 2
4. Summing the results of step n3
5. Divide the result by the period used (from the MMS)
6. It is the square root of the figure obtained in Step No. 5

The differences between the MMS and the fences are being put to the square to avoid having negative numbers (where a fence below the moving average) (there is subsequently a square root).


Standard deviation: Application to the trading and investment:


The standard deviation is an indicator used relatively little. It is often neglected for Bollinger Bands.
We often find that the violent price changes are preceded by areas where prices are not volatile (and thus a low standard deviation).