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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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