Standard Deviation Definition

Dictionary of Financial Terms

When someone says:

"We are witnessing a major market index trading at four standard deviations below its 200-day moving average."

What does that mean?

Standard deviation is, according to the Dictionary of Finance and Investment Terms, the statistical measure of the degree to which an individual value tends to vary from the average.

In short, the greater the deviation from the norm, the rarer the event, and thus the greater the likelihood of that event reversing, or never occurring again.

The book, Statistics for Business and Economics explains it in the following way: One standard deviation encompasses 68% of the historical possibilities in any given statistical study, while two standard deviations encompass 95% of these possibilities. This means that four standard deviations must include something like 99.99999999% of the possibilities -- meaning it doesn't get more unlikely than that!

Definitions of Financial Terms