Volatility measures how much and how quickly an instrument’s price moves. High volatility means large or rapid price swings, which increases risk when trading, while low volatility signals more stability. It can also describe the wider market conditions during prolonged periods of uncertainty.
What drives volatility?
- Economic events and data: inflation, employment figures, GDP, and central bank policies (particularly interest-rate hikes or cuts).
- Political and geopolitical events: elections, regulatory changes, and global conflicts.
- Investor sentiment: fear, greed, and market cycles influence buying and selling pressure.
- Corporate news: earnings reports (particularly if forecasts are missed), mergers/acquisitions, and scandals (fines, whistleblowing, etc.) can move share prices.
- Supply and demand: shortages, market liquidity, and global trade shifts.
- Black Swan events: economic crashes, natural disasters, and pandemics.
How do you measure volatility?
There are a few ways to track volatility. One is standard deviation, which measures how much prices are deviating from the average – a higher difference indicates higher volatility. Other methods include the VIX, or volatility index, which gauges expected volatility for the US 500. You can also use historical volatility, to assess price movements over a given period, based on past price data.
Always prioritise risk management during volatile market conditions, as increased fluctuations can amplify both potential gains and losses."