Statistics application in currency trading. Standard deviation

What trader would not want to know how high the quotation of the currency chosen for trading could go up or down? Of course, we can not look into the future and find this out for sure, but in this case a good help can be provided by statistics. Knowing how the chosen indicator changed in the past, it is possible to calculate with a high degree of confidence the degree of its change in the future. And here such indicator as standard deviation will help us. This indicator is also known as the standard deviation, standard deviation, quadratic deviation.

The standard deviation is one of the most commonly used indicators in statistics and probability theory. It shows the measure of the dispersion of a random variable with respect to its mathematical expectation. This number is expressed in the same units as the random variable itself. Consider how you can determine the standard deviation. The formula for calculating this indicator is as follows:

STD = √ [(Σ (Х-Хср) 2) / n], where

STD is the standard deviation,

√ [] is the square root,

Xp is the average value of the parameter under study for the n-th number of periods,

N is the total number of time periods.

When calculating it is necessary to take into account one nuance. If n> 30, n-1 is used as the denominator of the fraction.

Calculation of the standard deviation is conveniently done using the Excel application, which is now installed on almost every office computer. To do this, use the built-in STDEV formula.

Now let's talk about how you can use this indicator in the trade. Standard deviation is part of the technical indicators built into the popular Metatrader terminal, and shows the strength of price fluctuations relative to the moving average. In the event that its value reaches the next maximum, this means that at the moment the market is characterized by greater volatility and the price of the quotation is very much scattered relative to the average value. If the indicator reaches a minimum, then the market is in anticipation, and the prices of bars are pretty close to the mathematical expectation. Since the Forex market is characterized by a successive alternation of bursts of activity and calm, this indicator can be used to predict the next period.

So, if it is at a minimum, then very soon there will be a surge of activity and the value of the price may change dramatically. Usually this happens before the release of important news, or when there is uncertainty in the market, and neither bulls nor bears can achieve a decisive advantage. At this time it is better to prepare for the opening of the order immediately after the further direction of the price movement becomes clear, or open pending orders in both directions and wait until one of them works and close the second one.

If the indicator starts to go off-scale, it means that the activity of investors will soon fade away, and you should think about closing positions, as soon a correction or reversal may occur.

Standard deviation is often included in other indicators. A striking example of this are the Bollinger lines, in which this value serves to determine the upper and lower boundaries of the movement of quotes. These borders, along with the middle line, serve as distinctive elements of support and resistance. So if the price is fixed above the average, then it is expected that it will reach the upper limit, and vice versa, if it is in the lower range, it will tend to the bottom Bollinger line.

The middle line of this indicator indicates the direction and strength of the trend. The greater the angle this line makes with the X axis, the greater the strength of the trend. At this time, the standard deviation begins to increase. But if it becomes almost parallel to the horizontal axis, then this indicates a fading trend, the degree of dispersion is reduced, and the market goes into a state of rest or the expectation of another important event.