✔️ Information reviewed and updated in May 2024 by Eduardo López
Indicators like the standard error are a key point to learn about trading, especially as they are essential to better understand how technical analysis works. At present, you can find more than ten types of trading indicators.
It is important that operators, in addition to using the indicators as a tool, also make use of their knowledge and patience to the risk that may exist. The indicators in addition to being popular for their calculations also help to identify trends and signals that are happening within the financial market.
Next, we will show you everything you need to know about one of the most popular indicators among traders. The typical error or standard error measures the differences between real prices and the equilibrium curve.
✨Definition of the typical error indicator
The typical or standard error measures how much prices have deviated from a linear regression line for the same period. The larger the standard error, the larger the deviation of prices on a linear regression line during that period. In contrast, the smaller the standard error, the closer the prices will be to the linear regression line.
If all the closing prices were equal to the corresponding values of the linear regression line, then the standard error would be zero.
✨ What is the typical error for?
The standard error indicator not only tells what is the size of the random error that has been made, it also shows the likely precision that can be obtained when using a sample statistic to estimate a position parameter. In statistics, the typical or standard error serves to show a confidence interval with respect to the reliability of the calculations that were made in a sample. In other words, helps to determine the degree of estimation by which a sample may differ with respect to the population parameter.
✨ How do you get the typical error?
This indicator is a slightly more complicated statistical calculation to do. The least squares fit method is used to draw a trend line to the data by minimizing the distance that exists between the price and the linear regression trend line.
This method is used to find an estimate of the price for the next period. The standard or typical error indicator returns the statistical difference between the estimate and the actual price.
✨ How is it interpreted?
When prices approach the linear regression line it means that the trend is represented satisfactorily, and when it does not approach it means uncertainty in the trend.
That is, the larger the error, the less reliable the trend will be because prices spread far from the linear regression line. On the contrary, the smaller the error, the more reliable the trend will be because prices gather around the line.
This indicator is usually combined with the R indicator2 in order to better interpret the changes that exist in a trend. When both indicators are at opposite levels to converge, then a change in trend is expected.
