Moving Standard Deviation Trading Strategy – A Simple Explanation

Do you want to know more about the standard deviation indicator and forex volatility indicators? Watch our latest video on the moving standard deviation trading strategy to learn how to easily get profitable trading results with this simple profitable forex strategy.

The Moving Standard Deviation Trading Strategy

The financial markets tend to have average pricing over the longer term. This is quite often looked at as a smoothing mechanism, and deviation from that average can often lead to reversals that are due to exhaustion. This simple trading strategy uses that as a factor as to when to place a trade.

On this chart, the silver weekly chart, I have placed the Standard Deviation indicator at the bottom of my Metatrader 4 platform. As you can see, I have one level, the 2.0 level, marked on the indicator at the bottom of the chart. When the green line rises above the 2.0 level, it means that the market is more than twice the distance away from the overall average that it typically is. Using the idea of standard deviation in mathematics, we know that 95% of all statistical averages fall within 2 standard deviations of the mean. That’s exactly what this trading strategy is all about. It’s about markets getting too far ahead of themselves.

When you look at this chart, you can also see that I have the 20 Moving Average on the chart, but that’s essentially for illustrative purposes. As you can tell, early in 2013, Silver markets had bounced rather drastically and coinciding with this was an explosion in the standard deviation. In fact, we had reached as high as 3.57, something that is unsustainable. As we had been in a downtrend, the real trade would have been to play the bounce initially, and then on the exhaustive candle as we were still well above standard deviation, to sell. A more patient trader would have simply sold as it went with the overall downtrend. You can play this either way, and you played on all time frames. By selling silver at that point, you’ve seen a gradual decrease in the value of silver and we have stayed within 2 standard deviations since. Watching this indicator can give you an idea of when a significant turnaround is about to happen.