Volatility measures how much and how quickly prices change over a period. It’s a crucial concept for risk management and strategy selection.
Measuring Volatility
| Tool | Description |
|---|---|
| ATR | Average True Range — most common |
| Bollinger Bands | Width indicates volatility |
| VIX | “Fear index” for stock market |
| Standard deviation | Statistical measure |
High vs. Low Volatility
| High Volatility | Low Volatility | |
|---|---|---|
| Price movement | Large swings | Small ranges |
| Spreads | Wider | Tighter |
| Risk | Higher | Lower |
| Opportunity | More profit potential | Less opportunity |
| Strategy | Breakout, momentum | Range, scalping |
What Causes Volatility?
- Economic news releases (NFP, CPI, rate decisions)
- Geopolitical events (wars, elections)
- Market sentiment shifts
- Session overlaps (London + New York)
Key Points
- Higher volatility = wider stops needed
- Adjust position size for volatility
- Use ATR to quantify volatility objectively
- Trade during high volatility for bigger moves
- Reduce exposure during uncertain periods