Volatility In Financial Markets
What is Volatility
In a layman’s language volatility can be defined as the variations at which a market fluctuates. The less an asset’s price moves, the lower the volatility the more the price moves, the higher the volatility. Further defined it often refers to the amount of uncertainty or risk related to the size of changes in a security’s value. A higher volatility means that a security’s value can potentially be spread out over a larger range of values. It is, therefore, useful to think of volatility as the annualized standard deviation.
Volatility rises up gradually, The period of subtle unrest is followed by a sudden, vertical move in volatility that reaches a climax then it quickly reverses and normalizes.
Measuring volatility with Average True Range
Technical analysis is very important when trading, though there is no set of indicators that can accurately predict the future movement and volatility , history of the past price movement can be used to get an appreciation of what the future is likely to be.
The Average True Range indicator stands above most others when it comes to the measurement of volatility.( ATR) was created by J. Welles Wilder as complimentary indicator to his previous inventions like the RSI, Parabolic SAR, and the ADX and it is designed to measure specifically the True Range over a specified period of time.
Following are measurements and computational values:
- High of the current period less the low of the current period
- The high of the current period less the previous period’s closing value
- The low of the current period less the previous period’s closing value
Whether the the number becomes a positive or a negative, the largest of the three numbers is the true range, so over a period of time the average range can be calculated by simply dividing with the period.
Approach to Volatility
Higher levels of volatility means large price movements and its an opportunity to earn big but its also a big risk as price can be less predictable in high volatilities markets. There two ways which one can use volatility as a filter where one can use to determine which trading strategy to use and to measure risk outlay.