It's no wonder many traders have trouble understanding what volatility really means and how it affects their trading. To better understand this crucial aspect of trading, first we will look at what volatility represents, its inherent features and a simple way of measuring it. We'll also look at general ways of applying these concepts to the markets. In future articles, we'll look at more complex volatility measurements and more specific trading techniques.
Volatility is simply how much prices change over a given period of time.
For instance, if the Dow Jones Industrial Average goes up 10 points one day and down 10 points the next you would probably say volatility is low. However, if it goes up 200 points one day and down 200 points the next, then you'd probably say the market is volatile. In the most basic sense, that's really all there is to it. The more complex stuff has to do with measuring volatility consistently, tracking its behavior, and taking advantage of its characteristics. Although they might initially sound intimidating, again, the concepts are actually quite simple.