Standard Deviation (SD)

A measure of the market volatility. This indicator characterises prices fluctuation against MA. If the value of the indicator is high the market is volatile and bars prices are different against MA. If the value of the indicator is not high the market is characterized by a low volatility and bars prices are quite near MA.

Usually this indicator is used as a component of other indicators. Thus, when Bollinger Bands are calculated the value of the standard deviation of the instrument is added to its MA.

Calculation

StdDev (i) = SQRT (AMOUNT (j = i — N, i) / N)
AMOUNT (j = i — N, i) = SUM ((ApPRICE (j) — MA (ApPRICE (i), N, i)) ^ 2)

where:
StdDev (i) &— Standard Deviation of th current bar;
SQRT — square root;
AMOUNT(j = i — N, i) — sum of roots from j = i — N to i;
N — smoothing period;
ApPRICE (j) — applied price of j-bar;
MA (ApPRICE (i), N, i) — any MA of the current bar for N periods;
ApPRICE (i) — applied price of the current bar.

The market dynamics consists of successive alternation of periods of rest and moments of active trading, that is why approach to this indicator is simple:

• if the value of the indicator is too low, that is the market is calm, a moment of active trading should be expected soon;
• on the contrary, if the indicator is too high it means that activity may decrease soon.