Standard Deviation
Definition
Standard deviation is a statistical measure of how widely values spread around their average; in trading it measures how far price typically moves from its mean, so a larger standard deviation means higher volatility.
Example
“The flush took XYZ three standard deviations below VWAP, its widest stretch of the week.”
Detailed Explanation
Bollinger Bands are drawn two standard deviations above and below a 20-period moving average, and VWAP bands use the same idea around VWAP. Mean-reversion traders often express stretch in standard deviations: a stock trading 2.5 standard deviations below VWAP is unusually far from its average for that session.
One caution matters for day traders. The textbook rule that about 95% of values fall within two standard deviations assumes a normal distribution, and intraday price moves have fatter tails than that. Extreme readings happen far more often than the textbook suggests, especially on news, so a stretch of three standard deviations is a reason to look closely, not proof that a snap-back is due.
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