Approved for Advanced Traders

Standard Deviation Channel Indicator Helps to Predict Sentiment Extremes

Full Review of the Standard Deviation Channel Indicator for Binary Options

Standard deviations and channels are meant to go together. Like peanut butter and chocolate these forms of analysis combine to create a tool greater than its parts.


Standard deviations and channels are two methods of analysis long respected by the financial markets. Standard deviations are a pillar of statistical analysis and as such included in the calculation of indicators too numerous to count. Channels are form of analysis that assume prices will move within a set range and is also applied to a large number of theories and indicators ranging from Basic Price Channels to Donchian Channels. The standard deviation indicator is a combination of these two tools and more. While simple in appearance and easy to use this tool is really quite advanced and incorporates a number of technical theories. The tool is based on a linear regression and then projects two lines off of that creating a channel. This channel is set to a standard deviation, usually two, and provides a foundation for binary trading strategy.



What Is The Standard Deviation Channel Indicator

The standard deviation tool is a charting application that incorporates several forms of analysis. The tool starts with a linear regression and then creates an envelope around that line. This is similar to the linear regression channel tool but different in one crucial respect. The linear regression channel tool allows you to pick where the channel starts and stops making it a measure of ranges while the Standard Deviation Indicator is applied to the entire chart and is an indication of underlying trend. This indicator is best at two things; showing the underlying trend and highlighting extreme levels. These two pieces of information can then be applied to price action to pinpoint entries and foreshadow reversals.


Standard Deviation Channel Preview


The first signal is given by the linear regression line itself. This line will either be trending up or down and represents the underlying trend for the time period you are studying. The second signal is the extremes. The two outer channel boundaries are based on 2 standard deviations of the linear regression and represent levels at which asset prices are extremely high or low in relation to where it should actually be. Additional signals are given through price action and how it interacts with the channel and center lines. Anytime that prices reach or exceed the outer channel lines represents an extreme of sentiment and will likely result in a regression to the center line. While prices are trending around the center line it can be used for support, resistance or crossover signals as the situation merits.



Why This Tool Might Suck

This tool might suck because it is another version of a popular tool and nothing all that new. It also might suck because it isn’t adjustable. You can set the width of the channel but there is no adjustment for the regression period. While these are drawbacks to the indicator it still has uses but will definitely need other indicators to support it. For instance, a short term moving average like I have added to my chart can really help with picking entry for short term trades.



Why This Tool Doesn’t Suck

It doesn’t suck because it uses linear regression which is good. It also doesn’t suck because it uses channel theory, which is also good. Another reason it doesn’t suck is because it uses standard deviations to predict extremes, yet another good thing. Altogether these things make this tool very versatile and dare I say the basis of an entire trading strategy? You will of course want to use other tools to confirm signals but I think the channels themselves will make a fine framework to build a strategy on.



My Final Thoughts On Standard Deviation Channels

At first I was skeptical. I wasn’t sure what this indicator had to offer that other linear regression tools don’t. What I found is that this indicator lays a frame work onto your charts like the lines on a page of music. Once you learn to read these lines you can play your trades like a maestro plays his piano. The caveat is that this, like all tools and indicators, is not fool proof and will take practice to master. It is also recommended that you use additional indicators to confirm signals.