Which trader would not want to know how high the quotation of the currency chosen for trading can rise or fall? Of course, we cannot look into the future and find out for sure, but statistics can provide good help in this matter. Knowing how the selected indicator has changed in the past, it is possible to calculate with a high degree of certainty the degree of its change in the future. And here an indicator such as standard deviation will help us. This indicator is also known as standard deviation, standard deviation, standard deviation.
The standard deviation is one of the most commonly used indicators in statistics and probability theory. It shows a measure of the dispersion of a random variable relative to its mathematical expectation. This number is expressed in the same units in which the random variable itself is measured. Consider how you can determine the standard deviation. The formula for calculating this indicator is as follows:
STD = √ [(∑ (X-Khsr) 2) / n], where
STD - standard deviation,
√ [] is the square root,
Xav - the average value of the investigated parameter for the n-th number of periods,
n is the total number of time periods.
When calculating, one nuance must be taken into account. If n> 30, the value n-1 is used as the denominator of the fraction.
The calculation of the standard deviation is conveniently performed using the Excel application, which is now installed on almost every office computer. To do this, use the built-in formula STD.
Now let's talk about how you can use this indicator in trade. The standard deviation is part of the technical indicators built into the popular Metatrader terminal and shows the strength of price fluctuations in relation to the moving average. In the case when its value reaches another maximum, this means that at the moment the market is characterized by great volatility and the price of the quote is very much scattered relative to the average value. If the indicator reaches a minimum, then the market is waiting, and the prices of bars are quite close to the mathematical expectation. Since the Forex market is characterized by a sequential alternation of bursts of activity and calm, this indicator can be used to predict the next period.
So, if it is at a minimum, then a surge in activity will occur very soon and the value of the price can change dramatically. Usually this happens before the release of important news or when there is uncertainty in the market, and neither the bulls nor the bears can achieve a decisive advantage. At this time, it is better to prepare for the opening of the order immediately after the further direction of the price movement becomes clear, or open pending orders in both directions and wait until one of them works, and close the second.
If the indicator starts to roll over, then this means that the activity of investors will soon fade away, and you should think about closing positions, since correction or a reversal may soon occur.
The standard deviation is often part of other indicators. A striking example of this are the Bollinger Bands, in which this value serves to determine the upper and lower boundaries of the quotation movement. These boundaries, together with the middle line, serve as peculiar elements of support and resistance. So if the price has fixed above the average, then we should expect that it will reach the upper limit, and vice versa, if it is in the lower range, it will tend to the lower Bollinger line.
The middle line of this indicator indicates the direction and strength of the trend. The larger the angle this line makes with the X axis, the greater the strength of the trend. At this time, the standard deviation begins to increase. Well, if it becomes almost parallel to the horizontal axis, then this indicates a damping trend, the degree of dispersion decreases, and the market goes into a state of rest or waiting for another important event.