Standard Deviation Indicator

Standard deviation is a fundamental concept in modern statistics, but it plays a role in technical analysis too. The standard deviation indicator available in forex trading platforms provides a way to complement other technical indicators for a broad market analysis.

Standard deviation is already included as a component in volatility indications like Bollinger Bands, and traders would be wise to use it with another indicator. While standard deviations can pick market highs and lows, accuracy improves with layering it among other indicators.

How Standard Deviation Indicators Work

The standard deviation indicator calculates the recent movement in the price of a security (currencies, for our purposes) against past averages. The recording is a measure of how volatile the most recent periods have been in contrast to previous periods.

Market analysts believe the standard deviation readings can be used as an indicator for buying and selling signals. The logic behind its use is as follows:

• Sell signals – Peaks of standard deviation readings indicate that the market is rising too fast to be supported, indicating a future sell off.
• Buy signals – Dips in the standard deviation mark a market lull in volatility, which is typically a bullish indicator.

Bullish trades provide the best accuracy. When the market experiences high volatility, a selloff usually follows. However, a dip in standard deviation indicator lines is indicative of a general accumulation phase. Traders are least excited about markets at their bottoms, and most excited at their tops. Thus, standard deviation dips are far more accurate as buying signals than peaks are as a sell signal.

Standard Deviation Calculation

The calculus for standard deviation is not at all different from that of a statistical standard deviation calculation. To find a value for the standard deviation indicator, the following equation is performed:

((Closing Price – Y period Simple Moving Average of Close Values)^2 / Y periods)^1/2