Volatility measures the relative rate and extent that the price of a mark moves up or down. If the price of a market moves up and down wildly over a short period of time, it has high volatility; if the price remains relatively level and seldom changes, it has low volatility.

Volatility in markets can perhaps best be illustrated by looking at other examples such as a dangerous chemical substance or nitroglycerin or at a temperamental personality – they can blow up at any time with severe impact on things around them.

As used in markets and trading, volatility refers to the amount of uncertainty or risk involved in changes of a market’s value. High volatility suggests wide price ranges that can change dramatically in either direction over a short time period in either direction. Wild swings in market volatility may be caused by sudden shifts in supply/demand, weather or investor sentiment.

Volatility of a market may be compared with the market’s previous historical pattern or may be measured against some type of benchmark, such as comparing an individual stock’s performance against a stock index (beta). It is a particularly important factor in options pricing.

Analysts and traders have come up with a number of ways to quantify and use volatility in trading strategies. Among the indicators derived from volatility are: