Variance

19 apr 2022

Variance is a measure of dispersion, simply put, it is measuring how distant data is from it's mean(average). This indicator allows you to see when variance is increasing or decreasing, as well as when it is at an extreme value. Thru this, you can get a more accurate description of risk. When variance is increasing/high, you know to expect larger moves, as data(price) is far and getting farther from the mean. and when it is low/decreasing, you know that price movement is more likely to be less volatile due to data clustering closer to the mean, ie ; smaller values.

Variance is not a signal generating indicator in and of itself, but is more a tool to help tell you WHEN to trade. Use in conjunction with signal generating indicators such as Z-score to find entries.
For example, trading z score extremes when variance is increasing.

Variance works well alongside measurements of historical volatility to get a more accurate measurement of market risk/ volatility .