Article Turning Standard Deviation Bands into Overbought/Oversold Indicator

T2W Bot

Staff member
1,454 54
Limitations in usefulness of conventional standard deviation bands as overbought/oversold benchmarks
One of the popular ways of detecting a trend in financial market time series corrupted by random fluctuations (noise) is moving average smoothing. Actual prices fluctuate around the moving average. To measure an average distance of price values from the moving average the standard deviation (SD) can be used. The so-called in statistics ?range rule of thumb? determines the range of price variability around the moving average as approximately 4SD, providing confidence limit of about 95.5 %. According to the rule, the upper boundary of the range will be about 2SD above the moving average and the lower boundary of the range will be about 2SD below the moving average. In order to get higher confidence of the projected range, its half-bandwidth should be widened, for example to 3SD. The probability that the price data will be within plus or minus three standard deviations from...
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jmreeve

Well-known member
432 13
The sentence

"The probability that the price data will be within plus or minus three standard deviations from moving average is equal in this case to 99.7%"

Is not really true. This assumes market prices are normally distributed which is not the case. The probability of exceeding 3 standard deviations is usually much higher.
 

ZigZag

Active member
123 0
David, Thank you for an interesting article. You have certainly given your concept considerable thought. Im trying to test your conclusions using excel. However clarification is needed. You mentioned your price oscilator is calculated between the price and the M.A. Normally it is calculated using the difference of two MAs? Secondly is the S.D. calculated from the actual price of the product or the M.A.. Hope you can help. Thanks
P.S. I want to try it on FX. If I get the same results I will let you know.
 
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gmca686

Active member
117 3
Two points if I may

1 if using MAs and their derivatives to make statistical decisions, surely the MAs should be plotted half their distance back. eg a 9 day MA value would be plotted against day 5 data? This will alter the timing of boundary "hits"

2. A simpler approach to this issue has been shown by J M Hurst in his book "The profit magic of stock transaction timing" where he developed envelope analysis. It's one of my trading "bibles"

regards, G McA
 

qpu

Newbie
6 0
Hurst Channel - Hurst Band

I need to scan stocks for those moved above Upper Hurst Band and those moved below Lower Hurst Band.

Could you please recommend software that can automatically scan stocks and pick the right ones?
 

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