The Standard Deviation tells you how much volatility exists in the market. If the market is not very volatile, the standard deviation will be low. However in a highly volatile market, the value of this indicator will be high.
Standard deviation tells you whether price movements in the past are higher or lower than the current price movement. Traders who consider standard deviation utilize the idea that small price changes follow big price changes and vice versa. This just means that if a big change has recently occurred in the price, the volatility of the price is likely to drop.
Calculation of Standard Deviation Indicator
The formula that’s used for calculating Standard Deviation is :
StdDev = SQRT (SUM ((CLOSE – SMA (CLOSE, N))^2, N)/N)
In the formula above,
SQRT – square root;
SUM (…, N) – sum within N periods;
SMA (…, N) – simple moving average having the period of N;
N – calculation period.