What is Volatility?
Volatility is a statistical measure of how much a security's price fluctuates over time, calculated as the standard deviation of returns. Higher volatility means larger and more frequent price swings.
Volatility Explained
Volatility is not the same as direction — a stock can be volatile while going up or down. The VIX index measures implied volatility of S&P 500 options and is often called the 'fear gauge.' High volatility creates both opportunity (larger potential profits) and danger (larger potential losses). Position sizing should typically be reduced in high volatility environments.
Real-World Example
Stock A moves ±0.5% per day on average. Stock B moves ±3% per day. Stock B has six times the volatility. A trader using the same position size on both stocks is taking six times more risk on Stock B — which is why volatility-adjusted position sizing is critical.
Related Terms
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