Standard deviation and average deviation are two measurements used by many crypto traders as technical indicators when they’re entering a market. Both are popular ways to estimate the variability in a particular set of data. While the two measurements can be pretty similar, the actual differences lie in their methods of calculation and their views of the information.
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<source: google>
The standard deviation is actually one of the most widespread methods to evaluate the spread of a set of data. To calculate the standard deviation, you must find the mean or the average of the data points given by summing them up and dividing the output by the number of data points. Now you must subtract this average from each individual data point, and square the differences you find. Finally, average these squared differences again and come up with the square root of said mean.
So, for standard deviation, we have this formula:
Standard Deviation = √( Σ(xi – x)2 / n )
Where n is the number of data points taken.
Notably, the squaring of the differences between every point and the mean is done to do away with any negative differences for the values below the average.
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<source: google>
Another alternative to standard deviation for measuring the spread of observations in a set of data is the average deviation, or the mean absolute deviation. In fact, many crypto traders take it to be a better metric for variability when the data set given is not very well distributed. The average deviation is calculated in a very similar fashion to standard deviation, the primary difference being that it makes use of absolute values and not squares to negate the issues of negative differences between the many data points and their averages.
To come up with the average deviation, you again begin with calculating the means of all data points. Then you calculate the differences between the mean and every data point. Finally, evaluate the mean of the absolute values of those differences.
So, the formula for average deviation would be:
Mean Absolute Deviation = Σ|xi – x| / n
As per analysts and experienced crypto traders, when a set of data has normal distribution without many outliers, standard deviation is usually the better instrument to measure variability. However, when there are larger outliers present, the standard deviation method can lead to a higher level of deviation from the center than the average deviation.
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Disclaimer: This article was authored by Giottus Crypto Exchange as a part of a paid partnership with The News Minute. Crypto-asset or cryptocurrency investments are subject to market risks such as volatility and have no guaranteed returns. Please do your own research before investing and seek independent legal/financial advice if you are unsure about the investments.