Volatility
Volatility measures how much and how fast a price moves - opportunity for traders, and risk if size ignores it.
Volatility measures how much and how fast price moves. It is not direction, and position size should scale with it: high volatility needs smaller size.
Volatility is the degree of variation in an asset's price over time, usually measured by average true range or standard deviation. High volatility means larger and faster moves in both directions; low volatility means quiet, range-bound trading. Volatility is not direction: a market can be volatile and trendless. Position size should scale with volatility, and periods of compressed volatility often precede breakouts.
How It Works
- Measured by ATR, standard deviation or implied options volatility
- High after news and during crises, low in quiet ranges
- Compressed volatility often precedes breakouts
Trading Tips
Size positions by volatility, not by fixed dollar risk per level
Tight stops in high-volatility markets get picked off
Volatility regimes matter more than most signals - trade the regime
Volatility Example
Say EUR/USD moves about 60 pips a day most weeks, then a central-bank week pushes its daily range past 150. A 25-pip stop that worked fine in the quiet regime gets collected by noise in the loud one, with nothing wrong with the entry.
How Traders Use Volatility
Read the regime before the chart. When ranges expand, cut size or widen stops, never both against you. And watch compression: weeks of tiny ranges are where the next big move loads up.
Related Terms
Put Your Knowledge Into Practice
Compare regulated brokers and find the best one for your trading style.