Lesson 6 of 12

What Is Market Volatility?

Volatility describes how much and how quickly a financial market's price changes.

Some markets move gradually.

Others can rise or fall significantly in a very short period.

The greater the size and speed of the movements, the more volatile the market is considered.

Suppose an instrument normally moves around 0.5% per day.

Following an unexpected announcement, it moves 4% in a few hours.

The market has experienced a significant increase in volatility.

A market experiencing relatively small and gradual movements is considered less volatile.

Low volatility does not mean the market cannot move.

It simply means price movements have recently been more limited.

Many events can cause volatility to rise.

These include:

Volatility is neither automatically good nor bad.

It represents movement.

For traders, larger price movements can create opportunities, but they can also increase risk.

A position can move against a trader much faster during volatile conditions.

High volatility can sometimes be accompanied by:

This is why traders need to understand both expected return and potential risk.