What Is Volatility?
Volatility quantifies how much an asset's price fluctuates over time. The most common measure is the standard deviation of returns over a chosen window — for stocks, often annualised by multiplying by the square root of 252 trading days.
High volatility means large daily swings (both up and down); low volatility means quiet, range-bound action. Implied volatility — the volatility priced into options — is forward-looking and a barometer of expected future movement.
Volatility matters for traders in two ways. First, position sizing: in higher-volatility regimes, positions should generally be smaller because expected swings are larger. Second, strategy selection: trend-following systems thrive in volatile regimes; mean-reversion systems prefer quieter ranges. Trading the wrong strategy in the wrong regime is one of the most common retail mistakes.
Related terms
- ATR (Average True Range) — Volatility indicator measuring the average range of price movement per candle.
- Drawdown — The peak-to-trough decline in account equity during a losing streak.
- Bollinger Bands — Volatility bands plotted at standard deviations above and below a moving average.