Volatility is the statistical measure of an asset's price variation amplitude over a given period. The more strongly an asset swings in both directions, the more volatile it is.
How to measure it:
- Standard deviation of returns (historical volatility, classic finance formula)
- ATR (Average True Range): average true range of candles over N periods — useful to size stops and take-profits
- VIX: "fear index" — annualized implied volatility of the S&P 500 from options. VIX < 15 = calm, VIX > 30 = stress, VIX > 50 = panic (Covid March 2020: 82)
- IV (Implied Volatility): expected volatility priced in by the options market for upcoming weeks/months
Volatility by asset class (typical annualized):
- US Treasuries: 3-5%
- Gold: 12-18%
- S&P 500: 15-20%
- Individual stocks: 25-50%
- Bitcoin: 60-80%
- Altcoins: 100-200%+
Why it's crucial for your trading:
- High volatility = wider stops needed to avoid being whipsawed by noise
- Position sizing: more volatile = smaller size to keep your max risk constant
- Strategy choice: breakout in high volatility, range trading in low volatility
- High implied volatility = expensive options → selling options can be profitable (but risky)
Recurring volatility spikes: NFP (1st Friday of month), FOMC (8×/year), CPI, elections, crashes. Anticipating these moments is part of the job.