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Volatility
If you are a novice trader, then when choosing an investment asset, you will have to analyze several indicators, including its volatility.
Volatility in simple terms
Volatility is an indicator that characterizes the amount of change in parameters over a certain period of time (volatility – variability).
To analyze market risks, it is necessary to take into account the volatility of the asset price or
the volatility of the exchange rate.
Volatility in simple terms shows how much the price is able to rise or fall over a period of time.
For example, if you compare the change in the rate of different assets, you can see which one is more promising for making a profit. This parameter will show how likely sharp price drops are, which can turn into losses if the strategy is chosen incorrectly.
It is measured as a percentage of the average value of the parameter over any period of time and is calculated using the standard deviation formula. The most popular trading indicator that calculates the volatility of cryptocurrencies is Bollinger Bands. Based on historical data, it can predict price fluctuations in the near future.
Sometimes there is a comparison of the price of an asset in absolute terms. For example: “Yesterday the price of Bitcoin rose by 1000.00 USD, and today the volatility was twice as high and amounted to 2000.00 USD.”
Benefits and perils of volatility in trading
In different markets, asset price changes are evaluated individually. For example, in the stock market, a price change of more than 6% is considered critical. And high volatility in trading of cryptocurrency starts at 30%.
An abrupt change in price promises investors a big profit, but it is dangerous with high market risks. A low-volatility asset will become a safe haven for holding investments that will not depreciate sharply. What assets to choose – mainly depends on the trading strategy of your choice.
What determines volatility
In different historical periods, the volatility of the same asset may change.
The price change in the classical markets depends on the imbalance in supply and demand in the market. This, in turn, is determined by fundamental events that affect the volume of purchases and sales. The mood of market participants can be formed even without any specific events, but only from their expectations or news.
In the crypto industry, there are cases when, under the influence of information pumping, the price of an asset increased by 3000%, and then fell sharply. Because artificially created volatility in crypto markets is one of the most common manipulations for making super profits.
