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Volatility
Definition:
Volatility is a measure of a stock's tendency to fluctuate over a range of prices during a set period of time. RightLine Charts calculates volatility as the annualized standard deviation of the price fluctuation over a given period.
Interpretation:
Volatility has several uses and potential interpretations.
First, the degree of volatility of a particular security can be used to determine whether or not a stock should be considered for selection. Low degrees of volatility can suggest that a stock will tend to stick to its underlying trend while high degrees of volatility can suggest that a stock will move greatly about its trend. This knowledge can be valuable for incorporating into trading and investment strategies in a number of ways, including the likelihood of a price change being a trend change, how price movement is related to industry or market movement, whether a stock is more appropriate for longer-term or shorter-term analysis, and so on.
Second, when a stock tends to have a certain range of volatility over an extended period of time, and then breaks out of the range upward, it can mean that there will be a change in trend. If it breaks out of the range downward, it can mean that the frequency and severity of short-term price swings will decrease as the overall trend establishes itself among investors.
Third, recognizing cycles in volatility can be useful in determining appropriate times to anticipate a price breakout. Many stocks can have cycles with a high degree of regularity. Volatility's tendency to be autocorrelative (meaning that reversals often continue in the new direction) can help create circumstances to be a powerful leading indicator.
Finally, volatility can be used to calculate the theoretical option value.
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