STANDARD DEVIATION
Standard deviation is a measure of the spread of a set of numbers. More specifically, it measures how widely data values (in the case of forex charts we are measuring recent closing prices) are dispersed from the average of those values.
The larger the difference between the closing price and the average price, the higher the standard deviation and volatility of the currency pair. The closer the closing prices are to the average price, the lower the standard deviation or volatility of the currency pair.
According to statistical theory, when the market is in a range-bound condition, roughly 95 percent of recent closing prices are contained within two standard deviations of the moving average.
Think about this concept in simple real-world terms. Consider a market that is range bound and price pops above the upper Bollinger Band. Price does not belong there; it is out of its element. Under these ranging conditions, price will fall back within the standard deviation 95 percent of the time. Not an ideal time to go long.
Get The FX Bootcamp Guide to Strategic and Tactical Forex Trading now with the O’Reilly learning platform.
O’Reilly members experience books, live events, courses curated by job role, and more from O’Reilly and nearly 200 top publishers.
