What Does the Level of Volatility in a Market Measure?
In all markets volatility is the defining variable that can make or break a trade. Volatility is the speed at which changes take place in any market, and the change could either be high, medium or low. The concept of volatility is the standard deviation of the price against time. In some markets it can be interpreted as the sum total of all price variations over the market's duration and it can be either positive or negative.
Volatility is measured using the level of trading risk on a stock, bond or commodity. In simple terms this means the level of uncertainty that can be associated with any trade in a particular market. It is therefore important to know the level of volatility in a market before entering a transaction. This way you will know what to expect from the end result of your trade.
A simple example of how volatility can affect a stock is where a stock is bought at a low point, but is expected to go up. Because there is more profit to be made on selling a certain stock, the potential gain on a particular trade becomes greater. In order to predict whether this will happen the trader must know the level of volatility of the stock. This is done by finding out what the price of the stock is before the trade is entered and what it has achieved since the trade was entered. Once the profit is made then the amount the stock has increased is recorded, but the trader cannot rely on the trend of the stock being profitable to continue. This is where having knowledge of the level of volatility in a market comes in.
The level of volatility of a stock is not only affected by the volatility of the company, but by the quality of the company as well. It is also determined by the competition for that stock. If there is less competition for a stock that means there is a lower level of volatility. If there is too much competition then the volatility of the stock goes higher. There are also certain stocks that are considered stable due to their stability alone.
There are many different ways in which a trader can analyze the level of volatility in a stock but the most popular are the moving averages. The difference between a straight line (or line graph) and the moving average is that the moving average is calculated by taking the average of the previous data points and dividing them into a constant rate of change. By doing this the trader can predict what the stock is likely to do next.
The main thing that is important is to know what the value of a stock is. The trader can then use this value to set the level of volatility that they are looking for in their trades. The more that the trader is able to predict what the price will be that they can make the larger of a profit that they will make. As long as the predictions are accurate then the trader can make a profit. For a novice trader the most of their time should be devoted to learning how to read the charts and what level of volatility they need to be aware of in order to profit.
