Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. Before deciding to trade foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. You could sustain a loss of some or all of your initial investment and should not invest money that you cannot afford to lose. Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. Before deciding to trade foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. You could sustain a loss of some or all of your initial investment and should not invest money that you cannot afford to lose.

How to Trade Forex with Standard Deviations

The standard deviation simplifies large amounts of historical data into a single value that summarizes how much a market tends to move, and it can create the foundation of a trading strategy by helping to not only identify a potential opportunity but also set prices to open and close a trade.

What is a Standard Deviation?

Theoretically, a standard deviation measures the variance of a dataset by producing a range that incorporates 68.3% of its values; more practically, standard deviations give a quick, digestible synopsis of how an event is likely to play out using past data the event has produced.

For example, if the standard deviation of daily net changes in EURUSD is 0.0060, the market has closed inside a range of -0.0060 to +0.0060 (on a daily net change basis) approximately 68% of the time.

Identifying a Trade Opportunity

Traders can use a market’s standard deviation to create a baseline for movement and then identify potential opportunities in markets whose current net changes are outside that preconceived norm.

Contrarians might view a market that has risen past the upside of its standard deviation range as a potential selling opportunity; whereas they might view a market that has fallen through the downside of the range as a potential buying opportunity. Trend followers tend to take the opposite approach by buying markets exceeding +1 standard deviation and selling those down -1 standard deviation.

Entering a Trade

Deciding on a price to enter a trade at can depend on how aggressive the strategy is intended to be:

• Low – Enter at -1.5 and +1.5 standard deviation
• Moderate – Enter at -1.0 and +1.0 standard deviation
• High – Enter at -0.5 and +0.5 standard deviation

For example, a moderately aggressive day trader might enter a new trade in EURUSD when its daily net change is showing either -0.0060 or +0.0060 and then either manage for profit (loss) at -0.0030 or +0.0030 or loss (profit) at -0.0090 or +0.0090.

Standard Deviations and the Law of Large Numbers

Using standard deviations to create expectations and set management mechanics for a new position can be the difference between taking profits at a practical time and letting a trade run to potentially large losses. Not to mention that taking small P/L swings per position teemed with trading more often can reduce short-term risks on the way to realizing long-term goals.

Standard Deviations of Major Forex Pairs

Forex Pair

Standard Deviation

USD/JPY +/-1.6740
GBP/USD +/-0.0148
EUR/USD +/-0.0181
AUD/USD +/-0.0086
EUR/JPY +/-3.3900
USD/CAD +/-0.0078
EUR/GBP +/-0.0081
USD/CHF +/-0.0130
EUR/CHF +/-0.0222
GBP/EUR +/-0.0112

Standard Deviation calculated using 66 trading days of daily close data from June 10, 2022 to August 25, 2022 (Source: IG Trading Platform Standard Deviation Indicator)

This information has been prepared by IG, a trading name of IG US LLC. This material does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. You should not treat any opinion expressed in this material as a specific inducement to make any investment or follow any strategy, but only as an expression of opinion. This material does not consider your investment objectives, financial situation or needs and is not intended as recommendations appropriate for you. No representation or warranty is given as to the accuracy or completeness of the above information. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. Any research provided should be considered as promotional and was prepared in accordance with CFTC 1.71 and designed to promote the independence of investment research. See our Summary Conflicts Policy, available on our website.

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