Standard deviation is a widely used measure of variation in statistics. In statistics, standard deviation is a measure of the magnitude of the deviation between observed values in a data set. The measure of variation in standard deviation is part of a measure of dispersion that reflects the distribution of values around the mean (average).
The lower the standard deviation value, the closer the data value will be to the average value. Meanwhile, if the standard deviation value is higher, the wider the range of data variation.
In financial markets, standard deviation is generally used by investors to measure the amount of investment risk and determine the minimum level of return on investment products that investors want.
Standard deviation also helps investors determine the level of market volatility or the spread of investment instrument prices from the average price. A high standard deviation value means that the investment instrument is very risky. On the other hand, a low standard deviation value means that the probability of risk arising for the investment asset is also relatively lower.
Aggressive traders may choose instruments with a high standard deviation because they are very volatile, allowing for higher returns, even though they are in line with the risk. Meanwhile, conservative traders may prefer instruments with a low standard deviation because price fluctuations are low so they are lower risk.
The function of standard deviation in financial markets is to measure the magnitude of investment risk, compile and adjust investment portfolios, and predict returns and investment growth.
To calculate the standard deviation value using a certain formula, however, in forex trading, there are several indicators designed to measure volatility using standard deviation such as the Bollinger band and the Relative Volatility Index. You can read more about this topic here.
Although standard deviation is a useful tool in financial markets, it still has limitations, so traders may use other indicators as support to minimize the limitations of standard deviation.
The lower the standard deviation value, the closer the data value will be to the average value. Meanwhile, if the standard deviation value is higher, the wider the range of data variation.
In financial markets, standard deviation is generally used by investors to measure the amount of investment risk and determine the minimum level of return on investment products that investors want.
Standard deviation also helps investors determine the level of market volatility or the spread of investment instrument prices from the average price. A high standard deviation value means that the investment instrument is very risky. On the other hand, a low standard deviation value means that the probability of risk arising for the investment asset is also relatively lower.
Aggressive traders may choose instruments with a high standard deviation because they are very volatile, allowing for higher returns, even though they are in line with the risk. Meanwhile, conservative traders may prefer instruments with a low standard deviation because price fluctuations are low so they are lower risk.
The function of standard deviation in financial markets is to measure the magnitude of investment risk, compile and adjust investment portfolios, and predict returns and investment growth.
To calculate the standard deviation value using a certain formula, however, in forex trading, there are several indicators designed to measure volatility using standard deviation such as the Bollinger band and the Relative Volatility Index. You can read more about this topic here.
Although standard deviation is a useful tool in financial markets, it still has limitations, so traders may use other indicators as support to minimize the limitations of standard deviation.
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