Standard Deviation
Overview
Standard Deviation measures the dispersion of closing prices from their mean over a given period, providing the mathematical foundation for Bollinger Bands and many other volatility tools. Rising standard deviation signals increasing volatility across stocks, crypto, and forex. Review our indicator guide library to see how standard deviation powers multiple volatility-based trading tools.
How It Works
Standard Deviation = √[Σ(Close − Mean)² / N] over N periods. Low readings indicate price is clustered tightly around the mean (calm); high readings indicate price is widely dispersed (volatile). It is commonly plotted as a separate indicator below price.
Key Signals
- Very low standard deviation = volatility contraction, often precedes a breakout.
- Spiking standard deviation = sudden volatility expansion, confirming a strong move.
- Standard deviation declining after a spike = volatility returning to normal.
Common Mistakes
- Treating standard deviation as directional — it only measures magnitude, not direction.
- Using a single lookback period for all markets without adjusting.
- Ignoring the cyclical nature of volatility — low vol follows high vol and vice versa.
More Volatility Indicators
Chaikin Volatility
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Ulcer Index
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Historical Volatility
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Donchian Channels
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