This Ignored Indicator Will Help You Predict When You Should, or Shouldn’t, Buy A Stock

Learning to master this indicator can be a game changer for your investments in 2022 — taking your trading skills, and profits — to the next level.

Photo Credit: thinkorswim

You can get the code from this link if you want to take this indicator and tweak it to your liking — it’s fully open source and available to alter as you wish via thinkorswim’s script editor.

“Exponential Standard Deviation Bands” or (ESD) — By Vitali Apirine. Technical Analysis of Stocks & Commodities, February 2017.

What Exactly Are ESD Bands?

The Exponential Standard Deviation (ESD) Bands are a volatility-band technical indicator proposed by Vitali Apirine. This indicator comprises two lines (bands) plotted, by default, two exponential standard deviations above and below an exponential moving average, or EMA.

Let’s get this out of the way real quick: Here’s the technical aspect (not to mention extremely confusing) of how you calculate the EST

The exponential standard deviation is equal to the root mean square of price deviations from its exponential moving average.

Okay, now that we all have a headache from trying to read that sentence, let’s break this indicator down using language that most people, (or at least I do), will find more palatable.

The interpretation of ESD Bands involves several techniques — Four to be precise

I’ll keep this short and simple. I’ve found that short and simple tends to be the best kind of information a trader can get.

Let’s face it: The markets move fast and we don’t have time for BS!

What we need is actionable information that we can apply in our daily trading — and actually see results. So let’s get to it then.

Here’s the how ESD BANDS work, what types of analysis they’re helpful for, and what you need to know in order to use them effectively.

1.) Volatility Analysis

• In ESD Bands, the concept of volatility is based on the exponential standard deviation: the higher the volatility, the greater the deviation. Thus, the distance between the bands increases when the volatility level rises. Conversely, when the volatility decreases, the bands converge.

2.) Trend Analysis

• ESD Bands are trend-following and lag price action as the exponential moving average is used in the calculation. The bands tend to move upward in uptrends and downward in downtrends. In sideways trends, the bands move horizontally.

3.) Trend Reversal Detection

• The distance between the bands is generally substantial to keep the price plot inside. However, the price may be sometimes seen pierce either band indicating a possible trend reversal or emergence. When the bands move upward and the price rises above the upper band, the start of an uptrend is possible. Piercing the lower band when the bands are in downturn might signify the start of a downtrend.

4.) Sideways Trend Analysis

• When the trend is flat and the bands move in the horizontal direction, the price can be often seen form a peak at the upper band and a trough at the lower one.

Conclusion

This indicator is straightforward and easy to use in real time when you’re trying to decide if a trade is worth getting into, or, if it’s time to get out.

There’s no need to clutter your charts with 6 different indicators, 20 drawings, and a whole slew of god know what.

I swear…

I see some of these “How To Day Trade” guides and the things some of them are teaching are just, well — let’s just say that they’re a bit over the top — to say the least.

Don’t fall for the fancy looking, 3 monitor setups with a hundred indicators lighting up the room and Fibonacci drawings on every other timeframe.

You know, I once heard a saying that went something like this:

Keep it simple stupid!

And that ended up being some of the best advice I have ever received in all my years of trading!

When you keep your charts clean, focus on what works for you and your style of trading, and most importantly, use proven techniques and indicators, (like the one we just discussed), then you’ll start to get the results that you’re looking for.

It’s only hard to make money in the Stock Market until it’s not. Once it’s not — then you have it figured out... Sort of, but not really.

In reality, you’ll never have the market figured out — no one will!

But, you sure as hell can simplify it, and make picking your trades a lot easier in the process. At the end of the day, isn’t that what we all want?

Thanks for reading.

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This article was originally published on my website. I changed it up a bit for this version, but if you want to check out the original, here’s the link.