Standard Deviation is the statistical measure of market volatility. If prices trade in a tight narrow trading range then the standard deviation will return a low value indicating volatility is low. Conversely if prices swing wildly up and down then standard deviation returns a high value indicating volatility is high. What it does is measure how widely prices are dispersed from the average or mean price.
- Standard deviation rises as prices become more volatile. As price action calms, standard deviation heads lower.
- Market tops accompanied by increased volatility over short periods of time, indicate nervous and indecisive traders. Or market tops with decreasing volatility over long time frames, indicate maturing bull markets.
- Market bottoms accompanied by decreased volatility over long periods of time, indicate bored and disinterested traders. Or market bottoms with increasing volatility over relatively short time periods, indicate panic sell off.