Volatility

In terms of trading, volatility refers to the amount of change in the rate of an index or asset, such as forex, commodities, stocks, over a given time period.

Trading volatility can be a means of describing an instrument’s fluctuation.

For example, a highly volatile stock equates to large fluctuations in price, whereas a low volatile stock equates to tepid fluctuations in price.

Overall, volatility is an important statistical indicator used by many parties, including financial traders, analysts, and brokers.

Volatility can be an important determinant in developing trading systems, protocols, or regulations.

In the retail space, traders can be successful in both low and high volatile environments, however the strategies employed are often different depending upon volatility.

Is Volatility Good or Bad?

In the forex space, lower levels of volatile across currency pairs offer less surprises, movements, and are suited to certain types of individuals such as position traders.

By extension, high volatile pairs are attractive for many day traders. This is due to rapid and strong movements, which collectively offer the potential for higher profits.

However, the risk associated with such volatile pairs are manifold. Of note, volatility with instruments or indices can and do change over time.

There can be periods when even highly volatile instruments show signs of flatness, with price not really making headway in either direction.

For example, certain months in the summer are associated with low trading volatility.

Too little volatility is just as problematic for markets as too much. Too much volatility can instill panic and create its own issues, such as liquidity constraints.

A famous example of this are considered Black Swan events, which have historically roiled currency and equity markets.