volatility
How much price typically moves in a period; wider swings call for wider stops and smaller sizes.
Volatility describes how much and how quickly a price tends to move over a period. Larger, faster swings mean higher volatility; small, steady changes mean lower volatility.
Volatility is not a direction: price can be highly volatile while rising or falling. It can also change, so a recent range may not describe the next period. Wider price swings make a fixed position size riskier, because a stop or exit can be farther away or costs can change.
Example
In a five-day practice sample, Bluefin Energy closes at $20, $21, $19, $22, and $20. The largest close-to-close change is $3 (from $19 to $22). In another five-day sample, the closes are $20, $20.50, $20, $20.50, and $20; the largest change is $0.50. The first sample has wider observed swings. This small comparison describes these samples only and does not forecast future volatility.
Common mistakes
- Confusing volatility with direction. A big move can be up or down.
- Assuming recent volatility will stay the same. Conditions can change.
- Using the same position size through very different price ranges. Wider swings can mean larger losses before an exit.
- Treating a volatility measure as a forecast. Most people who trade lose money.
Learn it in the course
- Volume and volatility · Use the usual daily range to place a stop outside everyday noise and size the position from it, and see what volume can and cannot confirm.