Standard Deviation is simply a statistical measure of
volatility. It measures how widely values (e.g. closing prices) are spread from
the average (e.g. mean closing price). The more dispersed the data is, the
higher the `deviation' and the higher the volatility. The lower the deviation,
the lower the volatility.
Often, standard deviation is used to calculate indicators
such as Bollinger Bands. It's often used when trading derivatives, since it
provides a good indication of a security's volatility, which greatly affects the
pricing of derivatives.
Standard Deviation is derived by firstly calculating a simple
moving average of the selected data array (eg., the closing price or an
indicator), and summing the squares of the difference between the data array and
its moving average. This value is then divided by the number of periods over
which it is calculated. Finally, the square root of this result is calculated.
Fortunately, MetaStock does all the hard work for us.
SYNTAX Stdev(Data Array, Periods)
Data Array _ This is the data array used to determine the
Periods _ This specifies how many periods are used to
determine the standard deviation of the data array.
Here is an example using the Standard Deviation:
In the above example:
Data Array = C
Periods = 20
A more useful application of this example could be:
This formula checks that the present value of the 20 period
standard deviation of the close, is within 5 percent of its all time low. This
identifies securities with low volatility.
article is a snippet from the
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