Standard deviation is a statistical measure that calculates the amount of variability or dispersion in a set of data. In forex trading, standard deviation is used to measure the volatility of a currency pair’s price movement. Standard deviation helps traders to understand the level of risk and uncertainty associated with a particular currency pair. In this article, we will explain how to calculate standard deviation forex.
Step 1: Collect the data
The first step in calculating standard deviation is to collect the data. In forex trading, the data refers to the daily closing prices of a currency pair. The data can be collected for any period, but most traders prefer to use a longer period of time, such as one year or six months.
Step 2: Calculate the mean
The next step is to calculate the mean or average of the data. The mean is the sum of all the data points divided by the number of data points. For example, if we have the following data for the EUR/USD currency pair:
1.1000, 1.1050, 1.1075, 1.1100, 1.1150
The mean would be:
(1.1000 + 1.1050 + 1.1075 + 1.1100 + 1.1150) / 5 = 1.1075
Step 3: Calculate the deviation
The deviation is the difference between each data point and the mean. To calculate the deviation, we subtract the mean from each data point. For example, if we use the same data as above, the deviation for the first data point would be:
1.1000 – 1.1075 = -0.0075
Step 4: Square the deviation
The next step is to square the deviation for each data point. This is done to eliminate negative values, as we need to calculate the average of the deviations. For example, if we use the same data as above, the squared deviation for the first data point would be:
(-0.0075)2 = 0.00005625
Step 5: Calculate the variance
The variance is the average of the squared deviations. To calculate the variance, we add up all the squared deviations and divide by the number of data points. For example, if we use the same data as above, the variance would be:
(0.00005625 + 0.000015625 + 0.0000030625 + 0.00000625 + 0.000140625) / 5 = 0.000052
Step 6: Calculate the standard deviation
The final step is to calculate the standard deviation, which is the square root of the variance. For example, if we use the same data as above, the standard deviation would be:
√0.000052 = 0.00721
The standard deviation forex for the EUR/USD currency pair is 0.00721.
Conclusion
Standard deviation is an important statistical measure that forex traders use to calculate the volatility of a currency pair. By understanding the level of risk and uncertainty associated with a particular currency pair, traders can make better-informed decisions about when to enter or exit a trade. Calculating standard deviation forex requires collecting the data, calculating the mean, calculating the deviation, squaring the deviation, calculating the variance, and calculating the standard deviation. With this knowledge, traders can confidently use standard deviation to make more profitable trades.
