Standard Deviation

Name Type Prerequisite Use Cases
Standard Deviation (StdDev) Volatility OHLC Data Quantifies market risk and serves as the backbone for Bollinger Bands.

Definition

Standard Deviation is a statistical measure of volatility. In finance, it represents the dispersion of returns from the average return.

Mathematical Equation

\[ \sigma = \sqrt{\frac{\sum(x - \bar{x})^2}{n}} \]

Special cases

  • Maximum possible value: Unbounded
  • Minimum possible value: 0
  • Behavior: Moves independently to represent the statistical dispersion of price from its average.

Visualization

Standard_Deviation

Trading Significance

  1. Volatility: High Std Dev implies high volatility and potential risk.

  2. Market Tops/Bottoms: Extremely high volatility often marks tops/bottoms.