• For many, the thought of trading futures
may suggest aggressive trading—getting in
and out of positions several times a day. In
reality, it’s possible to be a more deliberate
futures trader. Leave the aggressive trading
to those who are extremely experienced.
Futures contracts are known for volatile
moves—whether it’s a reaction to a news
release, seasonal tendencies, or a certain time
during the trading day such as the open or
close. Should you chase each volatile trade?
Not necessarily. You can be patient and
wait for volatility before you open a position.
And you don’t have to close that position
the same day you open it. Although no one
approach or trading system can guarantee
anything in trading, there are some indicators you can apply that might help you identify when prices could be volatile.
STANDARD DEVIATION CHANNELS
One such indicator is standard deviation
channels. They're three straight lines on
your chart. The middle line marks the linear
regression, while the up-per and lower lines
are standard deviations above and below
the middle line. The nice thing is, you don’t
need to do all those calculations; you can
place these channels on your chart (see
Figure 1). Just fire up your thinkorswim®
platform from TD Ameritrade and bring up
the Charts tab.
1—Enter the symbol of the futures contract
you want to analyze.
2—Add the study by selecting Standard Dev
Channel. This displays the standard deviation channels with their default settings,
which may or may not be ideal. You can add
more than one standard deviation channel
to your chart and modify the settings so
they’re more meaningful.
3—Select Edit studies (beaker icon). From the
settings menu, select your inputs: the price
you want to use, the number of standard
deviations, and how many price bars you
want to display. You can also change the
appearance of your plot lines.
Figure 1 shows channels for one (blue) and
two (red) standard deviations plotted around
the linear regression line (yellow). These
lines or channels measure volatility, or how
far price is away from its mean.
We won’t get into the specifics of calcu-
lating standard deviations. But it’s helpful to
• One standard deviation encloses roughly
68% of price movement.
• Two standard deviations enclose roughly
95% of price movement.
• Three standard deviations enclose
roughly 99% of price movement.
Generally speaking, when prices trade
above or below the channels for one, two, or
three standard deviations, it could signal a
On the daily price chart in Figure 1, you
can see that /ES generally moves within the
one-standard-deviation bands for the most
part. But there are times when it moves
above and below those bands, and when
that happens, price tends to revert back.
That’s not to say that you should trade
whenever price moves outside the standard
deviation range. But it can be helpful to be
aware of it.
The further price moves away from the
mean, the more likely it is to be volatile. If
you were to pull up an intraday chart of
/ES, you’d likely see price moving outside
of both one- and two-standard-deviation
channels several times during the trading
day. Try it out on other contracts, such as
crude oil (/CL) and gold (/GC). Knowing
how price moves between the standard deviation channels is sure to lift your market
awareness up a notch.
SEASONED • BIG IDEA: TRACKING FUTURES TRENDS IS HARD. BUT
USING STANDARD DEVIATION CHANNELS CAN SIMPLIFY
THINGS WITH A BIRD’S-EYE VIEW.
FIGURE 1: Overlaying different standard deviation channels. Understanding how price moves within different
standard deviation channels around the mean can help you identify volatility and possibly reversals.
Source: thinkorswim® from TD Ameritrade. For illustrative purposes only.
For more information on the general risks of trading
and trading futures, see page 38 #1, 3.
Jayanthi Gopalakrishnan is not a representative
of TD Ameritrade, Inc. The material, views, and
opinions expressed in this article are solely those of
the author and may not be reflective of those held
by TD Ameritrade, Inc.
Words by Jayanthi Gopalakrishnan