Definition
A statistical measure that indicates how much your trading profits and losses deviate from your average PnL (Profit and Loss). A higher standard deviation indicates greater volatility in your returns.
Formula
The calculation of standard deviation involves:
- Finding the mean (average) of your trade PnLs.
- Calculating the squared difference of each trade PnL from the mean.
- Averaging the squared differences.
- Taking the square root of the average squared difference.
Example
Let’s say your last 5 trades had the following PnL:
- Trade 1: +$250
- Trade 2: -$100
- Trade 3: +$150
- Trade 4: +$300
- Trade 5: -$50
If the calculated standard deviation of this PnL data is $180, it indicates that your individual trade profits/losses tend to vary by about $180 around your average PnL.
Key Points
- Risk Assessment: A higher standard deviation suggests higher volatility and risk in your trading performance.
- Strategy Evaluation: Can be used to compare the risk profiles of different trading strategies.
Considerations
- Sample Size: A larger sample of trades generally provides a more reliable standard deviation calculation.
