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Standard Deviation

StdDev · module 28 of 33 · volatility

The dispersion of closes around their mean over a lookback period.

Standard Deviation on a chart
EUR/USD · 1h · demo data
1.09051.0791Std deviation (20) · pips22.42.7
  • SMA 20
  • σ

How spread out closes are around their average. Rising σ = expanding volatility.

How to apply it

  1. 1. Add it. Start with 20 on 15m (Intraday).
  2. 2. Read the market first. Rises during strong directional moves because a trend increases dispersion around the mean.
  3. 3. Adjust for ranges. Falls in tight consolidation; very low readings mark compression.
  4. 4. Manage the trade. Place the stop at 1.5 × ATR and the target at 3.5 × ATR, and only act when the chart above shows the trigger.

How it is calculated

σ = √(Σ(Cᵢ − mean)² ÷ n).

Inputs

  • · Period (20)

Reading it correctly

In a trend

Rises during strong directional moves because a trend increases dispersion around the mean.

In a range

Falls in tight consolidation; very low readings mark compression.

Settings by style

StyleSuggested values
Intraday20 on 15m
Swing20 on 4h

These are conventional starting points, not optimised values. Test any change on your own pair and timeframe before relying on it.

Worked example

Five closes 1.0850, 1.0860, 1.0870, 1.0880, 1.0890 have a mean of 1.0870 and deviations of −20, −10, 0, +10, +20 pips. σ = √((400+100+0+100+400)/5) = √200 = 14.1 pips.

When it failed

Standard deviation was used as a directional signal on EUR/USD. It rose sharply during a fall — as it does in any strong move — and the 'bullish volatility' reading was meaningless.

Limitations

  • Completely directionless.
  • Uses closes only, so it ignores intra-candle range and gaps, unlike ATR.
  • Sensitive to outliers because deviations are squared.

Works well alongside

  • · ATR
  • · ADX / DMI

Redundant with

  • · Bollinger BandWidth
  • · ATR
  • · Chaikin Volatility

Stacking these produces agreement by construction, which is not confirmation.

Practice exercise

Compare σ(20) and ATR(14) on 15m EUR/USD across a gapped Monday open. Explain the divergence in terms of what each formula uses.

Check your understanding

1. Standard deviation differs from ATR because it:
  • · Includes gaps
  • ✓ Uses closes only and ignores intra-candle range
  • · Is bounded
  • · Uses volume

ATR uses true range, which accounts for gaps and the full candle range; σ uses closing prices.

2. Rising standard deviation during a sharp fall indicates:
  • · Bullish pressure
  • ✓ Increased dispersion, with no directional meaning
  • · Falling volatility
  • · A range

Dispersion increases in any large move, up or down.