# Understanding Historical Volatility (HV): Definition, Calculation, & Uses

> **Definition**
>
> Historical volatility (HV) measures the price fluctuations of a security or index over time, indicating the level of risk associated with the asset.

## What Is Historical Volatility (HV)?

Historical volatility (HV) is a statistical measure of the [dispersion](https://www.investopedia.com/terms/d/dispersion.asp) of returns for a security or [index](https://www.investopedia.com/terms/m/marketindex.asp) over a period of time. It is usually calculated by determining the [standard deviation](https://www.investopedia.com/terms/s/standarddeviation.asp) of the asset from its [average price](https://www.investopedia.com/terms/a/averageprice.asp).

Investors and analysts use historical volatility to estimate the risk associated with an investment. The higher the historical volatility, the riskier the security. While historical volatility is based on past prices, it is often used in combination with implied volatility—the future risk, based on prices in the derivatives market.

### Key Takeaways

*   Historical volatility (HV) measures the dispersion of returns over a period, using standard deviation to assess risk.
*   HV doesn't predict losses but indicates how far prices move from their average value.  
    
*   Comparing HV with implied volatility helps assess if options prices are over- or undervalued.  
    
*   High HV indicates a riskier security, which may require higher risk tolerance and wider stop-loss levels.  
    
*   HV is a key input for technical analyses like Bollinger Bands, reflecting changes in market volatility.

## Analyzing Historical Volatility: Key Concepts and Applications

Historical volatility doesn't directly measure loss risk, but it can be used for that purpose. What it does measure is how far a security's price moves away from its [mean](https://www.investopedia.com/terms/m/mean.asp) value.

For trending markets, historical volatility measures how far traded prices move away from a central average, or [moving average](https://www.investopedia.com/terms/m/movingaverage.asp), price. This explains why a strongly trending but smooth market can have low [volatility](https://www.investopedia.com/terms/v/volatility.asp), despite dramatic price changes over time. Its value does not fluctuate dramatically from day to day but changes in value at a steady pace over time.

 Investors often compare historical volatility with [implied volatility](https://www.investopedia.com/articles/investing-strategy/071616/implied-vs-historical-volatility-main-differences.asp) to see if options are over- or [undervalued](https://www.investopedia.com/terms/u/undervalued.asp). Historical volatility is also used in all types of risk valuations. Stocks with a high historical volatility usually require a higher risk tolerance. And high volatility markets also require wider [stop-loss](https://www.investopedia.com/terms/s/stop-lossorder.asp) levels and possibly higher [margin](https://www.investopedia.com/terms/m/margin.asp) requirements.

Aside from options pricing, HV is often used as an input in other technical studies such as [Bollinger Bands](https://www.investopedia.com/terms/b/bollingerbands.asp). These bands narrow and expand around a central average in response to changes in volatility, as measured by standard deviations.

## Practical Uses and Implications of Historical Volatility

Volatility has a bad connotation, but many traders and investors can make higher profits when volatility is higher. After all, if a stock or other security does not move it has low volatility, but it also has a low potential to make [capital gains](https://www.investopedia.com/terms/c/capitalgain.asp). And on the other side of that argument, a stock or other security with a very high volatility level can have tremendous profit potential but at a huge cost. It's loss potential would also be tremendous. Timing of any trades must be perfect, and even a correct market call could end up losing money if the security's wide price swings trigger a stop-loss or [margin call](https://www.investopedia.com/terms/m/margincall.asp).

Volatility should be balanced, and what's considered balanced varies by market and even by stock. Comparisons among peer securities can help determine what level of volatility is "normal."