Is the gain-loss spread useful?

Figure 1 shows a weekly chart ofFlowers Foods, Inc. (FLO) for the 52-week period ending Jan. 30. Figure 2 shows FLO’s weekly percentage price changes over the same period as well as its average weekly percentage gain(green line) and loss (red line).Flowers Foods increased in 23 of the 52 weeks, and it dropped in 29 of those weeks. The average gain for the 23 up weeks was 4.0 percent, and the average loss for the 29 down weeks was 4.2 percent. In calculating the GLS, the average upside gain is weighted by the fraction 23/52, which is an estimate of the probability of gain; the average downside loss is weighted by the fraction 29/52, which is an estimate of theprobability of loss. The GLS is calculated as follows:

Weekly GLS = 23/52 * (4.0%) -
29/52 * (-4.2%) = 4.1%

Estrada’s article provides convincing evidence that the gain-loss spread is at least as good — and in some ways better — than standard deviation as a measure of stock-price volatility. One of its big benefits is simplicity.
Using the GLS, Flowers Foods’ volatility can be expressed as follows: In a typical week, Flowers Foods is expected to vary by 4.1 percent (up or down) from the prior week’s close. That is a simple, tangible statement about volatility.
Using standard deviation, Flowers Foods’ volatility is harder to grasp: The square root of the average quadratic
deviation from Flowers Foods’ arithmetic mean return is expected to be 36 percent.