Price volatility in the markets — what is it, a detailed overview

When watching financial news, you can often hear the words: «volatility has increased in the markets.» We come across this concept very often on stock exchanges, cryptocurrencies and Forex, especially in some «stressful» situations or the release of important news. In this article we will consider the question of what it is, what it is and how you can make money on it.

1. What is price volatility in simple terms

Volatility on the stock exchange (eng. «volatility» — «variability») — this is one of the metrics in the financial markets, responsible for the size of the price spread in a given interval. We can say that this value shows the range of price fluctuations.

In the process of trading, the prices of any financial assets are constantly changing. Even on days when the market has a low trading volume, there are still constant fluctuations due to large liquidity providers. Brokers and special agents act in their role.

In simple words: volatility is a characteristic of the volatility of the price of any asset.

Volatility is sometimes referred to as «volatility» and «volatility». It is the exact opposite of the concepts of «stability» and «constancy».


Usually high price fluctuations attract new bidders. Everyone wants to make money from price fluctuations. Although in fact it turns into a «game».

2. Types of volatility and examples

There are several types of volatility in the markets, depending on its strength:


  1. high — strong fluctuations. At such moments, the highest risks per trade. At the same time, there is a quick opportunity for traders to make money on trading;
  2. Medium (usual) — the usual situation in the market, when technical analysis works and everything is more or less clear;
  3. Low — characterizes the «trampling» of prices in a narrow range (plus / minus half a percent), usually a harbinger of strong movements, it is quite difficult to make money in such a market;

It is believed that high volatility is a sign of a «live market», where there are large trading volumes and great public interest.

An example of high volatility:


Price volatility in the markets - what is it, a detailed overview
Price volatility in the markets — what is it, a detailed overview

In the picture above, you can see how the price abruptly began to “jump” up/down. It just speaks of high volatility. Due to large and sharp fluctuations in the market, the trading volumes (volume) usually also increase. This is easy to explain, since many traders have accumulated stop losses and the market «carries» them. Some even get liquidated (margin call).

Note


Liquidation of a position is the forced closing of an open trade due to a lack of funds to secure it.

This situation is called «roller coaster». Such movements are very fond of speculators and intraday traders, because you can quickly and fairly decently earn.


However, trading at such times is risky and highly dependent on luck. With the same success, you can lose part of your funds. At these moments, classic indicators do not work well, as well as oscillators with overbought / oversold zones, support and resistance levels. Therefore, you have to focus only on your intuition and experience.

An example of low volatility:

Price volatility in the markets - what is it, a detailed overview
Price volatility in the markets — what is it, a detailed overview

Volatility has the property of cyclicity. Three stages change periodically: low, medium, high. Regularly there are changes in the type of activity from high to medium, from medium to low and vice versa. In principle, there is no need to look for constancy in the markets. Most often, after strong fluctuations in the market, there is a lull, and the market tends to average prices.

Change during the day

If we consider short periods of time (for example, one day), then the price volatility gradually increases every hour, starting from the opening of the European session (from 10-11 am Moscow time). The peak falls on the opening of the American session at 18-19 Moscow time. At night (in the Asian session) there are weak movements.

3. How to calculate the volatility index

Volatility can be calculated in two ways:

  1. Absolute expression (how much the price goes from high to low in a day);
  2. Relative expression (what is the price spread from high to low as a percentage);

According to the calculation method, volatility is divided into two types:

  1. Historical — already known to us and calculated on the basis of previous prices;
  2. Expected — is a complex forecast that takes into account many factors of technical and fundamental analysis, respectively;

If we talk about some characteristics, then there is no clear scientific basis. Most often, it is determined by the trader «by eye». Agree that we can easily compare price fluctuations in history with what we have now, and no special indicators are needed for this. However, many are wondering how to find such indicators and indices.

I advise you to pay attention to the following volatility indicators:

  • ATR;
  • Bollinger stripes;
  • CCI;
  • Momentum.
Price volatility in the markets - what is it, a detailed overview
Price volatility in the markets — what is it, a detailed overview
  • VIX < 20% — weak price fluctuations;
  • 20% < VIX < 30% — average;
  • 30% < VIX < 40% — elevated level, may be a harbinger of a crisis;
  • Vix > 40% — corresponds to the stock market panic;

You can trade on this index. In fact, it is a futures.

Russia has its own volatility index under the ticker: RVI.

Price volatility in the markets - what is it, a detailed overview
Price volatility in the markets — what is it, a detailed overview

Other volatility indices:

  • VXO — used before the VIX on the S&P 100;
  • VXD — similar to VIX index on Dow Jones 30;
  • VXN — Nasdaq volatility index;
  • RVX—Russell 2000 Volatility Index;
  • VXEEM — emerging market ETF volatility index;
  • OVX is the oil volatility index;
  • GZV — gold price volatility index;

4. Reasons and factors for increasing market volatility

As a rule, volatility does not just happen in the market. It is associated with the appearance of some risks, events. Consider the main reasons for its increase:

  1. Release of important news. For example, the US elections, the results of the Fed meeting on the interest rate. In economic calendars, you can see the «importance» of the news, which is marked by the number of stars (from 0 to 3);
  2. Some kind of disaster with possible economic consequences;
  3. Completion of an up/down trend;
  4. Emotions of bidders;
  5. A sharp change in supply and demand;
  6. Collusion of members of closed communities (for example, telegram channels);
  7. Rumors and expectations;
  8. Panic;

It is believed that the volatility of the national currency exchange rate within 2-4% during the year to the base (dollar / euro) is considered low. More than 15% — high. This is relative data. Naturally, it is almost impossible to keep the exchange rate within the range of fluctuations up to 4% during the year.

An example of a market with extremely high fluctuations is cryptocurrency (Bitcoin, Ethereum, Litecoin, etc.). The range of fluctuations in this market is much higher than the average in the stock market. This can be explained by the fact that the market is still young and extremely emotional.

Almost daily, the rate fluctuates between 4-6% and this is considered the lowest rates. Therefore, many traders have switched to trading cryptocurrencies.

5. Ruble volatility — what is it

Ruble volatility — This is an indicator showing the size of the fluctuations of the ruble against other currencies. The key pairs are Dollar/Ruble (USD/RUB) and Euro/Ruble (EUR/RUB). These pairs have the highest liquidity and volumes on the Moscow Exchange.

The following factors influence the volatility of the ruble:

  • Oil price;
  • Geopolitics (sanctions, world conditions);
  • inflow / outflow of capital;
  • Actions of the Central Bank of the Russian Federation;
  • Credit rating in the world;
  • The key rate of the Central Bank and its dynamics;

There are also seasonal factors. For example, by the end of the year, the ruble most often weakens due to purchases by companies to pay off their debts. August is also traditionally considered a bad month for the ruble. This month, in almost 100% of cases, the national currency becomes cheaper.

See also the video «Why market volatility is COOL, how to make money on it»:

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