Volatility: What is it and how does it affect day trading?
Volatility = Stability
Above all, in its most basic definition, volatility can be described as: “liability to change rapidly and unpredictably, especially for the worse.”
In day trading, it is the measure of a security’s stability. It’s usually calculated by finding the standard deviation of a return that has been compounded over a specific amount of time.
Define for the Masses
If you’re not into day trading, the definitions above could be a little tricky to understand. Fortunately, Day Trade FEED appeals to all levels of knowledge surround day trading!
Basically, volatility is the amount of movement a market sees over a certain amount of time. For instance, if a market has gone up and down more frequently than on average, that market has a high volatility index.
In contrast, if the market stays relatively consistent and doesn’t see many peaks or valleys, this market would have a low volatility index.
Low vs High Volatility: What does it mean?
Because of the nature of the market, certain movements can make or break a day trader’s account. This depends on if they have a short or long position in place.
When a market has a high volatility index, this means that the market has a high potential for risk. However, it also means that it has a high potential for reward.
When a market has a low volatility index, this means that the market has a low potential for risk. However, it also means that it has a low potential for reward.
Should I be scared?
A lot of market movement means there are a lot of chances to make money. Traders simply need to make sure they know which way the market is trending.
Also, pay attention to your charting software to ensure you are in and out of trades at the most efficient times possible.
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