What is Volatility?
Volatility is a statistical measure of the dispersion of returns for a given security or market index. In the most cases, the higher the volatility, the riskier the security. Volatility can either be measured by using the standard deviation or variance between returns from that same security or market index.
In the securities markets, volatility is often associated with big swings in either direction. For an example, when the stock market rises and falls more than one percent over a sustained period of time, it is called a “volatile” market.
Market volatility can be observed and measured through the VIX or Volatility Index. The VIX was created by the Chicago Board Options Exchange as a measure to gauge the 30-day expected volatility. India VIX is a volatility index of Indian market, also called the Fear Gauge, based on the index option prices of Nifty.
It is effectively a gauge of future bets investors and traders are making on the direction of the markets or individual securities. A high reading on the VIX implies a risky market. A variable in option pricing formulas showing the extent to which the return of the underlying asset will fluctuate between now and the option’s expiration.
Volatility, as expressed as a percentage coefficient within option-pricing formulas, arises from daily trading activities. How volatility is measured will affect the value of the coefficient used. Volatility determines your profit per trade.
Channel technique often works best on stocks with a medium amount of volatility. Very little volatility and the channel won’t be very big, which means small profits. Bigger channels, typically associated with more volatility, mean larger potential profits.
Volatility is used in Bollinger Bands also. Bands in Bollinger theory placed above and below a 20 period simple moving average. The bands automatically widen when volatility increases and narrow when volatility decreases.
Trading with understanding of volatility can give you great profits to the traders. To learn all the concepts in details and to master the skills of trading and investing in the stock
market you can contact us and become a skilled and profitable trader and investor.
