Glossary / Risk

Volatility

Also called: realised volatility · implied volatility

Volatility measures how much a security's price varies around its own average over a period. It describes the size of movement, in both directions — a security that rises steeply and steadily is high-volatility, and volatility on its own says nothing about direction.

How it is measured

How is volatility measured?

Realised volatility is the standard deviation of periodic returns over a past window, usually rescaled to a common time unit for comparability. Implied volatility is derived from current options prices by solving an options-pricing model for the volatility input that reproduces the observed price. The first summarises what happened; the second summarises what options are currently priced for.

Why it matters

Why does volatility matter to a swing trader?

Volatility is the scaling factor that makes different securities comparable: the same percentage move means something different in a security that typically moves a little and one that typically moves a lot. It is also the input underneath most position-sizing arithmetic. The known limits are that it clusters — calm periods and turbulent ones both persist, so a recent reading is a poor guide to a distant one — and that standard deviation treats upside and downside variation identically.

Related

See this in the product

The live market regime view · Full methodology

Related terms

Average true range
Average true range is the average size of a security's daily trading range over a recent window, where the range is defined to include any overnight gap.
VIX
The VIX is an index of the volatility expected over the next 30 days in the S&P 500, derived from the prices of that index's options.
Drawdown
Drawdown is the decline from a peak value to the lowest point reached before a new peak, expressed as a share of that peak.
Beta
Beta measures how much a security's price has historically moved for a given move in its benchmark.

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General information about market vocabulary, written to be descriptive rather than prescriptive. Not investment advice — see the risk disclosure.