Variance (VAR)
period = 20 (5–100) Overview
Variance in technical analysis measures the spread between price values over a specified period, providing crucial insights into market volatility and price stability. As the square of standard deviation, variance gives more weight to extreme price movements, making it particularly sensitive to outliers and sudden market shifts. This mathematical property makes variance an essential component in risk assessment and volatility analysis, forming the basis for popular indicators like Bollinger Bands and serving as a key input for portfolio optimization strategies.
The calculation involves finding the mean price over the lookback period, computing the squared difference between each price and the mean, then averaging these squared differences. This process emphasizes larger deviations from the mean, helping traders identify periods of market instability or impending volatility expansion. While standard deviation is more commonly displayed due to its same-unit measurement as price, variance provides the raw volatility metric that many advanced trading systems utilize for position sizing and risk management decisions.
Interpretation & Trading Signals
Volatility Analysis:
- Low Variance: Market stability, potential volatility expansion ahead
- High Variance: Increased volatility, potential trend change or breakout
- Rising Variance: Market uncertainty increasing, wider price swings expected
- Falling Variance: Market consolidation, range-bound conditions likely
Trading Applications:
- Breakout Trading: Low variance often precedes significant price moves
- Position Sizing: Adjust trade size inversely to variance levels
- Stop Loss Placement: Wider stops in high variance, tighter in low variance
- Options Trading: High variance suggests elevated option premiums
Risk Management:
- Portfolio Allocation: Use variance to balance risk across assets
- Volatility Targeting: Scale positions to maintain consistent risk
- Market Regime: Identify trending vs ranging markets by variance patterns
- Entry Timing: Wait for variance contraction before trend trades
Example Usage
Code examples will be available once the Rust implementation is complete.