What is Standard Deviation?
Standard deviation is a statistical measure of how spread out prices are from the average, used in trading to quantify volatility and the probability of price movements.
Standard Deviation Explained
In trading, one standard deviation covers about 68% of price observations, two cover about 95%, and three cover about 99.7%. This is the basis for Bollinger Bands and many risk management calculations. A stock with a higher standard deviation is more volatile and requires smaller position sizes to maintain equal risk.
Real-World Example
A stock has an average daily return of 0.1% with a standard deviation of 2%. About 68% of the time, daily moves will be between -1.9% and +2.1%. A move beyond ±4% (two standard deviations) would be unusual and might signal a significant event.
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