Surprise Move Indicator
Did you know that the Surprise Move of a security is just a modified version of the Sharpe Ratio?
The Sharpe Ratio for a security is a measure of its return divided by its volatility. It normalizes the size of the move by comparing it to recent history, so that it’s easier for traders to gauge the significance of the move itself. When you hear in the media that “the market fell 2 standard deviations” they refer to the Sharpe Ratio of the security.
The indicator is an oscillator of sorts, allowing investors to answer questions like “What happened the last 10 times that S&P 500 fell 2 standard deviations?”. It is usually used as a mean reversion guide.
The indicator is named after Nobel prize-winner William F. Sharpe, who developed it in 1966. Originally the calculation subtracted the risk-free rate from the return calculation.