Standard
Deviation
Standard
Deviation, a statistical concept,
provides a reliable measure
of volatility.
Overview
Standard
Deviation is used as a component
of many indicators in market
analysis. In most cases, a
high standard deviation implies
high volatility and a low
standard deviation implies
low volatility. Basically
it's a measure of variability,
or how much the price varies
from its moving average.
Here's
a quick statistical refresher
Standard
Deviation is a basic statistical
concept. Consider a group
of students taking an exam.
You'll typically find that
some score very high and some
score very low, but most scores
tend to cluster around the
average. If you plot the results
on a chart, you typically
see the bell curve you may
remember from high school
(even though we don't like
to remember where we
were on the bell curve!).
This is also referred to as
the normal distribution curve.
Now, back to business.
You
can also plot Standard Deviation
for security prices. SD describes
how prices are spread around
an average (mean) value. The
mean is the intermediate value
between the extremes.
One
month or twenty working days
is the usual period used.
Interpretation
Major
tops are typically accompanied
by high volatility
during the blow-off phase
of a market, as investors
become more and more nervous
and ready to take profits.
Major bottoms are usually
calmer, with low volatility,
as the hopes for quick profits
have faded.
- The
smaller the difference
between closing prices
and the mean price, the
lower the SD and the lower
the volatility
- The
larger the difference
between the closing prices
and the average price,
the higher the SD and
volatility.
Standard
deviation is useful for investing
in stock options, because
it provides a measure of volatility.
- The
higher the volatility
for a particular stock,
the higher the option
premiums
- The
lower the volatility is
for a particular stock,
the lower the option premiums
Further
information
Also
see Average
True Range, another volatility
indicator.
