Standard Deviation Indicator
Standard Deviation indicator is a technical indicator that measures the activity of the market on the basis of volatility. You can use the indicator to build your trading system.
Description
The Standard Deviation indicator measures market activity based on the current volatility. It shows when an asset enters or exits a dormant state. The assessment is based on the price deviation from the selected moving average.
The idea is that the financial market has periods of rest and periods of activity. It is desirable always to see the points and zones of price equilibrium. According to statistics, such a line is linear regression. The concept of Standard Deviation shows the difference from its value:
- Upward deviation – the predominance of selling
- Downward deviation – the predominance of buying
Prices between the lower and upper boundaries of the Standard Deviation indicator are considered an equilibrium zone.
Standard Deviation indicator calculation
The calculation of values is taken from classical statistics and applied to current prices:
Where:
StdDev (i) – standard deviation from the current candle;
n – is the smoothing period;
ApPRICE (in) – the price applied for the bar with the corresponding number;
ApPRICE (i) – the price used for the current bar of the candlestick;
SMA (apPRICE (i), n, i) – any moving average of the current bar over n periods.
The absolute value of the indicator is usually not used for analysis. The explicit direction of the trend is not shown. Only the general dynamics of the line are important – active or “dormant.”
How to use Standard Deviation indicator in trading?
The ease of use offsets the complicated calculation:
- Small values of the SD indicator characterize the market as passive (flat), that is, you need to wait for a breakout in any direction.
- A rise in the line means an increase in activity (that is, the deviation from the average increases), and the faster it grows, the stronger the subsequent price movement.
- A pullback of the line from the high means a decline in volatility (market activity decreases).
Standard Deviation indicator trading strategy
The trading strategy based on Standard Deviation is discussed below:
Buy strategy
- Look for the SD indicator when in flat phase.
- Wait for the SD indicator value to increase and move out of flat zone.
- Wait for the bullish candle to appear.
- Enter the market with stop-loss below the local low and take profit near the next horizontal level on the upside.
Sell strategy
- Look for the SD indicator when in flat phase.
- Wait for the SD indicator value to increase and move out of flat zone.
- Wait for the bearish candle to appear.
- Enter the market with stop-loss above the local high and take profit near the next horizontal level on the downside.
Standard Deviation indicator conclusion
Standard Deviation is a technical trend indicator. It can be used to find the active and dormant states of the market. You can use the indicator to enter the trades but it is prudent to use a confirmatory tool to increase probability of success.