Standard Deviation
is used to measure of volatility when stock trading, usually as
an adjunct to other indicators, e.g. Bollinger Bands use a stock's
Standard Deviation to widen or narrow the bands depending on the
underlying volatility. Dramatic changes in price imply a large standard
deviation, whereas flat prices suggest low standard deviation. Tops
and bottoms usually coincide with high standard deviations of volatility
because investors are unsure about market direction. Systems using
day trading ideas and standard deviation are fairly common, although
the fact that action tends to happen at the margins makes interpreting
such signals difficult.
To calculate the standard
deviation, take a simple MA of (a certain period) of price or other
factor, then sum the squares of the difference between the price
and the moving average over each of the preceding periods, next
dividing this by the number of periods, and then finally taking
the square root of this number.
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