Volatility

What is Volatility?

Market volatility indicates the degree to which the price of an asset varies over a duration. In simpler terms, it reflects the roughness of price changes in an unpredictable way. When;

• High Volatility: As when the market is volatile, it can be said that prices undergo rapid and wide-ranging fluctuations. It shows a high degree of action, which means it is fun for quick profits, but you can also expect plenty of losses. 
• Low Volatility: In contrast, when the market is less volatile, the prices are not expected to move much. This seems like a greater bet, but it does come with fewer chances of a great deal. 

Why It Matters: 

Volatility is a measure of risk for Investors. 

• High volatility translates into high risk which in turn means the high potential for a trade to either succeed or fail. 
• Low volatility translates into a lower risk and expectations towards the trade, but on the downside, low volatility trades offer lesser chances for profit. 

Types of Volatility; 

• Historical Volatility: Examines previous price movements. 
• Implied Volatility: Forecasts movements of prices and is widely used in options trading. 
• Market Volatility: Pertains to the variation of prices of the entire market or an index. 
• Volatility of Volatility: Refers to the variability of volatility over time. 
• Structural Volatility: Has to do with long term shifts in volatility that are brought about by major economic events. 
• Sector-Specific Volatility: Is concerned with the volatility that occurs within a sector. 

Causes of Volatility: 

• News. 
• Change of Economies. 
• Investors (Greed/Fear).