Volatility – what does it mean
Volatility (in English volatility) is a statistical financial indicator that displays and characterizes the volatility of the course of any kind of assets (currency, stocks, metals, etc.). The ability to work with volatility – to analyze price fluctuations, is one of the most important skills of a trader.
Simple language about volatility
Above, we examined the concept of “volatility” using a theoretical example. Now let’s see how everything looks in practice. Asset volatility is usually measured in relation to another asset. For example, the ratio of the dollar to the hryvnia or ruble.
At the time of writing, June 24, 2019, the dollar against the hryvnia is 1: 26.18, and against the ruble 1: 62.74. During the month, the cost of the hryvnia varies between 26 hryvnia 5 kopecks and 26 hryvnia and 88 kopecks. The so-called “backlash” is 83 kopecks. The hryvnia exchange rate against the dollar is 3.1%. To get this figure, we divided the “backlash” – 83 kopecks, by the current dollar price in hryvnias – 26 hryvnias 18 kopecks or 278 kopecks.
To calculate the volatility of the ruble against the dollar, it is necessary to make the same calculation. This calculation formula is applicable to the Forex market – for the analysis of currency pairs, stocks, etc. To calculate historical volatility, there is another formula – a more complex one, which is perfectly described on the Wikipedia website. You can familiarize yourself with it below.
What is volatility
Authoritative sources provide various types of volatility information. We can distinguish 3 types:
Actual and historical volatility displays the current volatility indicator for a certain period of time. If 1 day is taken into account, then this is the actual volatility, if the month or year is historical.
The term “expected volatility” is understood to mean the forecast of price changes over a certain period of time.
In addition to manually calculating volatility, traders use various indicators that provide more information for market analysis. The most popular computer analysis tools for calculating volatility are:
- Average True Range (ATR);
- Bollinger Lines;
- Channel Index (CCI).
Based on the statistics of a specific asset, it is customary to distinguish 3 types of volatility:
- Normal (medium);