Standard Deviation Ratio as a Measure of Relative Volatility
Summary
The Standard Deviation Ratio (SDR) compares the standard deviation of a shorter period with that of a longer period, using the same starting point. The document traces its introduction to Tushar Chande’s work on a volatility index used in the VIDYA or Variable Moving Average. A larger ratio means recent observations are more dispersed around their mean relative to the longer-period measure, which the source associates with a stronger trend.
The ratio is presented primarily as a measure of current volatility, similar to standard deviation. It does not identify whether prices are rising or falling, so a separate directional indicator is needed to determine trend direction. The short-period standard deviation can exceed the long-period value, meaning the ratio has no fixed upper bound, although the document says it is usually below one. No specific parameter choices, market examples, or performance tests are provided.
Key ideas
- SDR divides a shorter-period standard deviation by a longer-period standard deviation with the same starting point.
- A higher ratio indicates greater recent dispersion relative to the longer-period measure.
- The ratio can exceed one and has no fixed upper limit, though it is said to remain below one most of the time.
- SDR measures volatility and does not reveal the direction of a price trend.
- A separate directional indicator is needed when using SDR to assess trend direction.
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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.