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Standard Deviation is a statistical measure of volatility. It measures the difference between the market’s closing price and its average price over a defined preceding period of time. The more the price ‘deviates’ from its average i.e. the larger the difference between the closing and average prices, the more volatile the price is said to be and the higher the Standard Deviation. The Bollinger Bands® indicator is based on Standard Deviation.
In times of high price volatility the Standard Deviation increases and in times of low volatility the Standard Deviation decreases.
The Standard Deviation is based on the range of price movement relative to the Moving Average. The number of periods associated with the Standard Deviation, are used to calculate the moving average, and the number of deviations is used to calculate the Standard Deviation around the moving average.
The prices at each interval for the defined number of periods are used to determine the deviation values. One standard deviation represents 68.2% of the range of price movement relative to the moving average; two standard deviations represent 95.4% of the price movement relative to the moving average and therefore only excludes the extreme highs and lows during the period; three standard deviations represents 99.6% of the price movement.
Standard Deviation Formula
The expectation is that the price distribution around the Simple Moving Average forms a bell curve and that Standard Deviations can be used to establish if the price movement is within normal trading ranges. The following chart provides a visual representation of a classic bell curve with the Standard Deviations representing the range of price movement captured within each deviation:
- 1 Standard Deviation (1σ) = 68.2%
- 2 Standard Deviation (2σ) = 95.4%
- 3 Standard Deviation (3σ) = 99.6%
The Standard Deviation chart is calculated based on 1 Standard Deviation. Multiply the Standard Deviation by 2 or 3 to calculate it at vary deviations.
To calculate the Standard Deviation start by calculating the Simple Moving Average, where is typically 10 or 20 periods:
To calculate the Standard Deviation:
Standard Deviation Indicator
The Standard Deviation indicator can be displayed on the TimeToTrade charts. To add the Standard Deviation indicator to the TimeToTrade charts, go to the chart settings and click on the 'Add Indicator' button. Click on the search box and type the name of the indicator that you are looking for, or for example type Standard Deviation and scroll through the results:
After adding the Standard Deviation indicator, within the chart settings, click on it to set the parameters and change colours.
Standard Deviation Alerts
Alerts can be set up to provide an Email or SMS text message notification of when your Standard Deviation indicator chart conditions have been met, backtest trading strategies or execute demo trades. To learn more:
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