Measuring volatility

Risk management starts with measurement. The most common measure of how much a market moves is volatility, and there are several ways to estimate it.

Common measures

• Standard deviation of returns: how widely returns spread around their average over a chosen window. Often annualised so different markets can be compared.
• Average true range (ATR): the average size of each bar's full range, including gaps from the previous close. Expressed in price, so it translates directly into ticks and money.
• Realised volatility: what the market actually did over a past period.
• Implied volatility: the level of future volatility priced into options on a market. It reflects expectations, not history.

Volatility clusters

Calm periods tend to follow calm periods, and turbulent periods tend to follow turbulent ones. This is called volatility clustering. It means recent volatility is usually a better guide to the near future than a long-run average, and it is why many risk models give more weight to recent data.

Why it matters

The same stop distance carries very different meaning in a quiet market and a volatile one. A stop that is comfortably wide on a calm day can sit inside ordinary noise on a busy one. Measuring volatility is what turns a fixed rule into one that adapts to conditions.

Educational content only. Not financial advice.