When dealing with the Forex market, it is very important to understand standard deviation of price. If you want to be successful in the Forex market and you want to win at trading, understanding this concept is very important. Surprisingly, few Forex traders have ever heard of standard deviation of price, and even if they have heard of it, many do not understand how it works.
Understanding the standard deviation of price allows traders to have an increase in Forex profits. If you understand this concept, you will be able to come into the Forex market and have a head start. You will be ahead of the many Forex traders who are not doing as well as they could with the market.
What exactly is the standard deviation of price?
The standard deviation of price is a term that provides information about the volatility of prices in the Forex market, or any market to be more exact. This term can be applied to any type of market that deals with investments. From bonds, to shares and to commodities, the standard deviation of price becomes very important.
The concept is able to give the view of how closing prices, also known as widely values, are given off and dispersed from the common price. In this case, dispersion is said to be the difference that exists between the closing price and the mean closing price. Dealing with these two prices, the larger the standard deviation price is between the two, the higher the standard deviation of the Forex market is.
If you find that the standard deviation is high, it indicates the changing of prices in the market. If closing prices do not have a big difference from average mean prices, the standard deviation is much less, as is the markets volatility.
High standard deviation values happen when prices in the Forex market are very volatile. On the other hand, low standard deviation values occur when the range of the market is tight and stable, and prices are continuously fluctuating.
How is standard deviation calculated?
The calculation of this term is pretty easy to understand. Firstly, you have to take the square root of the average of the squared deviations from the mean. If you do not understand this, do not worry because it's not as complicated as it reads. Today, there are a lot of visual indicators that can help you to understand the calculation.
When and how to use standard deviation to make money
When you notice that short term price spikes occur and during this time they become very volatile, it is usually a reflection of the emotions going on around the world. When people are looking for things, some get really greedy. Fortunately, these spikes are short-lived and are temporary. Prices usually fall back to a reasonable value soon after. To make money with this concept, just remember that supply and demand + investor perception = price. If you can remember this, you will never lose out on the Forex market.