2Bull Forex Blog

Understanding the concept of standard deviation of price is essential if you want to win at forex trading yet very few traders have even heard of it, let alone understand it. If you understand it and its significance you can get a head start on the vast losing majority and enjoy greater forex profits and we will look at standard deviation in more detail in this article.

Standard Deviation Defined

Standard deviation of price is a statistical term that gives an indication of the volatility of price in a market and it can be applied to any investment market - shares, bonds, commodities and of course forex.

Standard deviation simply gives a view of how widely values (closing prices) are dispersed from the average price. Dispersion is defined as the difference between the actual value (closing price) and the average value (mean closing price).

The bigger the difference between the closing prices and the average price, the higher the standard deviation of the market studied will be.

Of course if standard deviation is high, this indicates the volatility of the price in the market studied.
On the other hand, if the closing prices are close and do not fluctuate much from the average mean price, standard deviation is less and the markets volatility is considered less as well.

How Standard Deviation Calculated

To calculate standard deviation is simple:

All, you do is take the square root of the variance, the average of the squared deviations from the mean.
Don’t worry if you don’t understand the calculation above, you don’t need to know how an internal combustion engine works, to drive a car.

There are visual indicators to help you which we will return to in a moment.

High Standard Deviation values occur when prices are highly volatile and low Standard Deviation values occurs, when prices are fluctuating in a tight range or more stable.

How to Use Standard Deviation for Profits

When short term price spikes occur and prices become highly volatile, this is normally a reflection of human psychology, reflecting the emotions of greed and fear driving prices to far from fair value.
If you look at any forex chart you will see that all short term price spikes are temporary and prices quickly fall back to fair value.

Human psychology pushes prices too far and when sentiment peaks, prices fall and vice versa in a bear market.

This happens time and time again and will continue to happen, because human nature never changes. Humans will always push prices to far away from the fundamentals.

This is the equation that works in any free market and that includes forex here it is:

Supply and demand news + Investor Perception of = Price.

The Fundamentals news etc is NOT important - it’s how investors perceive the supply and demand situation that is.

When a big price spike occurs you know it’s not going to last and if you can sell or buy it at the right time you can make money - but you must time your trading signal correctly.

So how do you measure it?

In part two of this article we will look at this in greater depth and how to use Bollinger bands in association with other timing tools, to hit the high profit turning points at the right time.

Standard deviation of price is a concept you must understand, if you want to be a successful forex trader; not only will it help you spot important market tops and bottoms, it will help you place stops correctly and determine profit targets.

We will look at all the above in relation to standard deviation in next posts, for now you have an idea of what standard deviation is and why it’s so important.

“Finally, a time-tested Forex trading system, with DOCUMENTED PROOF, that has the potential to turn $1,000 into $1,000,000 in just 24 months.” This is the claim that Adam Burgoyne boldly makes for his 5EMAs Forex System on the front page of his website. Maybe this might be an achievable claim to make if it were aimed only at trading veterans, but is it realistic to think that a beginner could actually accomplish this too? This 5EMAs review will attempt to answer that question.

If as a beginner you’re serious about forex trading, then you need to take the time necessary in order to learn the ins and outs about trading the forex market in the real world. It may take a few months of paper trading or actual online trading for the beginner to gain enough experience in trading the forex market before he feels comfortable making trades. So, don’t expect to hit the ground running right out of the box. Expect that you’ll need to give yourself some time to gain the requisite knowledge and experience of in-the-trenches trading.

One thing about this program that will help speed up this process is the availability of an Expert Advisor, which will alert you whenever it identifies the criteria for an entry. By setting the timer you can get alerts before a potential trade is eminent. You will need to have the MetaTrader4 charting platform, which is available in a free download, in order to properly use the Expert Advisor. By confirming that all the rules for a successful trade have been met according to the 5EMAs system, you will have complete control over your trading.

The EA feature can save the inexperienced trader much time and independent analysis. It can also be set for longer term trading possibilities for those who are not able to sit and monitor a trading period throughout the day. This feature allows those who would like to transition from their day jobs to full-time forex trading a real possibility. Combining the use of the Expert Advisor with a proper review and comprehension of the trading rules it applies to the trades it identifies will assist the beginning trader in speeding up his learning curve.

The 5EMAs refers to the exponential moving averages of recent price changes in the market. One important consideration that a beginner needs to be aware of when using exponential moving averages is that while EMAs are generally more sensitive than a simple moving average (SMA) and therefore generate more signals, there will also be an increase in the number of false signals and whipsaws. Being able to tell when these are likely to occur is something that comes only with experience in trading the market. No matter how good a system may be, no system is perfect all the time.

That said, this system has the potential to earn a great deal of money in forex trading. With the proper approach, using care and consideration, even a beginner can make steady money in trading the forex currency market.