The Standard Deviation is used to measure the intensity of the market’s fluctuations by calculating how much prices are deviated from their Simple Moving Average. If the standard deviation is high, then it indicates a big fluctuation in the price movement, which also indicates that the price is dispersed from its moving average. If the standard deviation is low, then it indicates small fluctuation in price the movement and so, the price is fairly close to its moving average. The Standard Deviation is used in FXLORDS’ Managed Forex Accounts, Forex Trading Signals, and it is among subjects discussed in the Training Course.
In statistics and the probability theory, the Standard Deviation is considered the most commonly used statistical measure of dispersion to measure statistical scattering.
Meaning of dispersion can be explained with the following example: numbers 9,10,11 have an average of 10, which is the best value to present this group. Numbers 8.10,12 also have an average of 10, as well as 6,10,14, and so the average is just not enough in giving a precise definition of a data set and so, statisticians suggested introducing the Standard Deviation and other indicators to reflect the extent of dispersion of a data set.
This indicator can help you decide whether volatility is likely to increase or decrease. A very high standard deviation reading indicates that a huge price change has just occurred, but that a decrease in volatility could soon follow. A very low reading indicates the opposite.
The increase in the number of market participants can be clearly seen through the high trading volatility in the markets, and therefore, the indicator can be interpreted quite easily:
• If the value of the indicator is low, which means that prices are not active, it is only logical to expect intense fluctuation in the near time.
• If the value of the indicator is high, then it means that the price activity is intense, as in the case of the price penetrating support and resistance levels.
Typically, this indicator is used as a part of a trading system, the most used indicator with it is the Moving Average. In this case, a high Standard Deviation reading when prices are far from the Moving Average means that prices are far from their average and they should go back to the Moving Average. On the contrary, if the Standard Deviation reading is low then the price will stay moving the same way it is.