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Standard deviation is a concept all fore traders should understand, as it will give you a greater edge in your quest for forex trading success.
If you want to understand it read on and find out how it can make you a more profitable forex trader.
Standard deviation is logical and will help you time entries better and define targets for trades.
What is standard deviation?
Standard deviation is a statistical term that shows the volatility of price in any instrument including forex.
Standard deviation measures how widely values (closing prices) are dispersed from the average.
Dispersion is defined as:
The difference between the actual value closing price and the average value or mean closing price.
The larger the difference between the closing prices and the average price, the higher the standard deviation and volatility of the currency measured will be.
The closer the closing prices are to the average mean price, the lower the standard deviation or volatility of the currency.
The confusing bit (don’t worry we will simplify it later) but here is the definition:
Standard deviation is calculated by taking the square root of the variance, the average of the squared deviations from the mean.
High Standard Deviation is present when the price of the currency studied is changing dramatically.
Conversely, low Standard Deviation values occur when prices are more stable or less volatile.
Spotting Contrary trades
Major tops and bottoms are accompanied by high volatility as prices reflect the psychology of the participants.
Greed and fear, push prices away from the average to unsustainable levels and prices eventually return to the mean average.
Why is standard deviation such an essential study?
Any currency moves with the following inputs determining the price:
Supply and demand fundamentals + investor psychology = Price.
Taking Advantage Of Human Psychology
A big rise in volatility and a dramatic move away from the mean average, means that emotions are moving the currency too quickly away from the mean.
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