What Is Standard Deviation?
Standard deviation (SD) is a statistical measure of how much individual data points deviate from the mean. In trading, it quantifies price volatility — a high standard deviation means prices are spread far from the average (volatile), while a low standard deviation means prices cluster tightly around the average (calm).
How Standard Deviation Works
In a normal distribution, approximately:
- 68% of data falls within 1 standard deviation of the mean
- 95% falls within 2 standard deviations
- 99.7% falls within 3 standard deviations
Bollinger Bands use 2 standard deviations from a 20-period moving average, meaning price should stay within the bands ~95% of the time. Moves beyond 2 SD are statistically extreme.
Why It Matters for Traders
Standard deviation provides probabilistic frameworks for trading. VWAP + 2SD bands identify statistically extreme intraday moves. Bollinger Band width (based on SD) measures volatility cycles. Mean-reversion strategies explicitly trade the assumption that extreme SD moves will revert. Understanding SD transforms technical analysis from pattern recognition into statistical edge.
