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Topic: What does volatility means with example? (Read 275 times)

legendary
Activity: 1946
Merit: 1157
MAaaN...!! CUT THAT STUPID SHIT
July 17, 2023, 02:00:14 PM
#25
Hi can someone explain volatility with example, I understand what it kinda means but find it hard to implement in reality. Like for example if btc volatility is 4% does that means it goes up and down 4%? Everywhere i find it shows formulas which i am not interested in, I am interested in how I can implement it in my trading decisions.
First, understand what this means properly and correctly and where it leads. because if I'm not wrong In the context of trading, volatility is often considered as one of the risk considerations for the uncertainty associated with the investment that we are running, if you already understand, then you play.

The easy explanation as suggested by @Darker45 means what if you are a current trader with a low risk profile, you may want to avoid assets that have high volatility, because large price fluctuations can result in large losses and vice versa, if you are a trader with a high risk profile, high volatility is a potential opportunity for greater profits for your trading decisions.
It also depends on how long you are planning to hold a certain asset despite the level of volatility that it carries. if you are a short-term trader with a low-risk profile, you should definitely avoid assets with high volatility, but if you are a long-term trader with a low-risk profile, you might consider assets with high volatility because that wouldn't affect your portfolio or trades that much since you won't be selling your assets very soon.

The same thing applies to users with high-risk profiles that are trading either for short-term or long-term, they need to choose assets accordingly after determining the level of volatility they carry. A lot of traders don't look at such metrics before making trades which becomes an issue later on.

But after all, assets with high volatility will provide faster returns because the set price targets are quickly achieved. Although using a long term strategy a fixed price target is set, if it is reached first it is good luck. The most suitable asset for crypto users and the safest is Bitcoin, it will be better for the long term with moderate volatility. We will see Bitcoin reach ATH again later. The more Bitcoin assets held, the more profit you will get.
full member
Activity: 1134
Merit: 140
Hi can someone explain volatility with example, I understand what it kinda means but find it hard to implement in reality. Like for example if btc volatility is 4% does that means it goes up and down 4%? Everywhere i find it shows formulas which i am not interested in, I am interested in how I can implement it in my trading decisions.
First, understand what this means properly and correctly and where it leads. because if I'm not wrong In the context of trading, volatility is often considered as one of the risk considerations for the uncertainty associated with the investment that we are running, if you already understand, then you play.

The easy explanation as suggested by @Darker45 means what if you are a current trader with a low risk profile, you may want to avoid assets that have high volatility, because large price fluctuations can result in large losses and vice versa, if you are a trader with a high risk profile, high volatility is a potential opportunity for greater profits for your trading decisions.
It also depends on how long you are planning to hold a certain asset despite the level of volatility that it carries. if you are a short-term trader with a low-risk profile, you should definitely avoid assets with high volatility, but if you are a long-term trader with a low-risk profile, you might consider assets with high volatility because that wouldn't affect your portfolio or trades that much since you won't be selling your assets very soon.

The same thing applies to users with high-risk profiles that are trading either for short-term or long-term, they need to choose assets accordingly after determining the level of volatility they carry. A lot of traders don't look at such metrics before making trades which becomes an issue later on.
sr. member
Activity: 966
Merit: 306
Well, I would say bitcoin options markets are already mature, as there are several billions of dollars in open interest and much more trading every given day.

Also, you described “historical volatility”, or the volatility Bitcoin has already experienced in the past. Options market quote the implied volatility, or the volatility bitcoin is expected to have toward the expiry of the option.
Totally a different animal: one is backward looking, the other forward looking.
I agree that we can not use past data, look at the past performance of Bitcoin and past events, then say Bitcoin will have similar movements in future. Backwards and Forwards are very different and many things in future will not be the same like in the past.

Nevertheless, the common points between the past and the future, no matter what events will appear in future, are the psychological cycle of the market will not change; and the emotional as well as psychological responses of majority of the market participants will be repeated.

Greedy people will repeat their past faults in future, buy high sell low, and will continue their failure to control their emotion.

Fear and Greed index. They will be fearful when they need to be greedy and do oppositely when they need to be fearful, they are greedy.

legendary
Activity: 2268
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Fully fledged Merit Cycler - Golden Feather 22-23
[When the Bitcoin options market matures, it will be possible to calculate Bitcoin's implied volatility, which is in many ways a better measure.

Well, I would say bitcoin options markets are already mature, as there are several billions of dollars in open interest and much more trading every given day.

Also, you described “historical volatility”, or the volatility Bitcoin has already experienced in the past. Options market quote the implied volatility, or the volatility bitcoin is expected to have toward the expiry of the option.
Totally a different animal: one is backward looking, the other forward looking.
sr. member
Activity: 882
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#SWGT CERTIK Audited
Hi can someone explain volatility with example, I understand what it kinda means but find it hard to implement in reality. Like for example if btc volatility is 4% does that means it goes up and down 4%? Everywhere i find it shows formulas which i am not interested in, I am interested in how I can implement it in my trading decisions.

First, understand what this means properly and correctly and where it leads. because if I'm not wrong In the context of trading, volatility is often considered as one of the risk considerations for the uncertainty associated with the investment that we are running, if you already understand, then you play.

The easy explanation as suggested by @Darker45 means what if you are a current trader with a low risk profile, you may want to avoid assets that have high volatility, because large price fluctuations can result in large losses and vice versa, if you are a trader with a high risk profile, high volatility is a potential opportunity for greater profits for your trading decisions.
sr. member
Activity: 966
Merit: 306
Usually, volatility is computed on a daily basis, considering closing prices.
So, it is not accounted open to close, but close (previous day) to close (same day). This might not be a difference for cryptos that trade h24, but for stocks or other assets that trade only during exchange hours can be a huge difference.
Also usually intraday volatility is not considered, as probably high-low range are not accounted for.
I am not sure there are different Bitcoin Volatility Index.

Volatility Index (BuyBitcoinWorldWide.com) uses this formula for their index.
Quote
What is Bitcoin daily volatility?

Bitcoin's daily volatility = Bitcoin's standard deviation = √(∑(Bitcoin's opening price – Price at N)^2 /N). You can use the following formula for a general timeframe volatility calculation: √timeframe * √Bitcoin's price variance.

What definition of volatility does The Bitcoin Volatility Index use?
The standard deviation of daily returns for the preceding 30- and 60-day windows. These are measures of historical volatility based on past Bitcoin prices. When the Bitcoin options market matures, it will be possible to calculate Bitcoin's implied volatility, which is in many ways a better measure.

It is created by Carol Alexander and Arben Imeraj in 2020.
Methodology
Bitcoin Volatility Index (BVIN) Methodology & Use Cases
sr. member
Activity: 644
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Volatility has to do with unpredictability of the market, a sharp or sudden  rise or fall in market price or security.  An easier way to understand it is whenever the market price acts against or beyond what it's predicted that means volatility.
As for the percentage, it's a way to measure the strength of the volatility as it occurs
You can get an extensive explanation using this link  https://www.businessinsider.com/personal-finance/what-is-volatility?r=US&IR=T#:~:text=Volatility%20is%20often%20expressed%20as,the%20more%20volatile%20the%20stock.
full member
Activity: 532
Merit: 181
Hi can someone explain volatility with example, I understand what it kinda means but find it hard to implement in reality. Like for example if btc volatility is 4% does that means it goes up and down 4%? Everywhere i find it shows formulas which i am not interested in, I am interested in how I can implement it in my trading decisions.

Volatility is a key concept in many parts of financial planning. Volatility is usually used in the context of purchasing and selling options. Implied Volatility is one of the factors that contribute to the premium, or price, of an option. If you believe that volatility in a market will rise, you may communicate that belief by purchasing a long option contract based on that market. If the underlying market's volatility rises (all else being equal), the option's value rises as well. This is a highly simplified depiction, because options' prices are also influenced by other factors such as the underlying's price, time to expiry, and so on. They are also leveraged investments, which means you could lose more than you put in.
hero member
Activity: 952
Merit: 555
Hi can someone explain volatility with example, I understand what it kinda means but find it hard to implement in reality. Like for example if btc volatility is 4% does that means it goes up and down 4%? Everywhere i find it shows formulas which i am not interested in, I am interested in how I can implement it in my trading decisions.

Bitcoin being a volatile cryptocurrency, you can define volatility in respect to bitcoin as the ability of a currency to remain on an equilibrium position always and be affected by any slight fluctuations experienced base on it demand and supply, if you want to learn how this works with trading then you will have to begin an entire journey about bitcoin trading and understand what it means to trade and why, maybe you can go through this trading guide as well.

New to bitcoin trading?
https://bitcointalksearch.org/topic/m.61999785
legendary
Activity: 2268
Merit: 16328
Fully fledged Merit Cycler - Golden Feather 22-23
Hi can someone explain volatility with example, I understand what it kinda means but find it hard to implement in reality. Like for example if btc volatility is 4% does that means it goes up and down 4%? Everywhere i find it shows formulas which i am not interested in, I am interested in how I can implement it in my trading decisions.
Volatility is the proneness to change quickly and unpredictably.In simple terms, volatility refers to the price swing of assets. It evaluate the difference between the opening and closing prices over a certain period of time. Take for instance, a pair that is swinging between 2-20 pips is less volatile than a pair that swings between 30-100 pips.
What causes volatility are political, economic, wars and social events, as a trader, one should be aware of current events and keep up on global and financial news in order to make profit and to avoid unrealized losses
Usually, volatility is computed on a daily basis, considering closing prices.
So, it is not accounted open to close, but close (previous day) to close (same day). This might not be a difference for cryptos that trade h24, but for stocks or other assets that trade only during exchange hours can be a huge difference.
Also usually intraday volatility is not considered, as probably high-low range are not accounted for.

Again, in layman's terms, this does not change the correct explanation you gave, but it is relevant when trading.
jr. member
Activity: 38
Merit: 3
Hi can someone explain volatility with example, I understand what it kinda means but find it hard to implement in reality. Like for example if btc volatility is 4% does that means it goes up and down 4%? Everywhere i find it shows formulas which i am not interested in, I am interested in how I can implement it in my trading decisions.
Volatility is the proneness to change quickly and unpredictably.In simple terms, volatility refers to the price swing of assets. It evaluate the difference between the opening and closing prices over a certain period of time. Take for instance, a pair that is swinging between 2-20 pips is less volatile than a pair that swings between 30-100 pips.
What causes volatility are political, economic, wars and social events, as a trader, one should be aware of current events and keep up on global and financial news in order to make profit and to avoid unrealized losses
legendary
Activity: 2268
Merit: 16328
Fully fledged Merit Cycler - Golden Feather 22-23
Thanks guys for your help but I still gotta say still very confusing but I still appreciate all your guys helps and yeah I think using indicator like ATR is way better option then trying to make strategy based on what current volatility is of asset.


Bear in mind these kinds of indicators are based on historical volatility.
What instead is interesting to you is the future volatility of your asset.

It's like driving looking at the rearview mirror: "well, the road has been straight for the last 3 km, then it should be straight also for the next mile.
You can be right, and you'll be most of time, but the reality is also you'll end up failing, and when you do, you usually do that spectacularly.

Nobody said trading volatility is easy.
member
Activity: 70
Merit: 12
Thanks guys for your help but I still gotta say still very confusing but I still appreciate all your guys helps and yeah I think using indicator like ATR is way better option then trying to make strategy based on what current volatility is of asset.

You know I am actually scared of asking questions as there will always be few people who will say something like "you are dumb and i am superior there are so many articles about it" or "you are dumb i am superior trying to take shortcuts learn everything from scratch formulas and everything" but thanks God there is none of such person...my bad there was one Cheesy
legendary
Activity: 2576
Merit: 1860
To illustrate it a lot simpler, let us take as an example Bitcoin. Let's say it opens at $30,000. A couple of hours later the price moves down to $29,000. 5 hours later, the price bounces to $32,000. 10 hours later, the price went back to $29,000. And then it finally closed at $35,000.

That's basically what volatility is. It refers to the sharp movements in prices within a relatively short period of time. The level of volatility also fluctuates. There are times when Bitcoin is less volatile, for example. Unpredictability is also a big factor. You cannot really predict when the market will experience so much price turbulence and when it somehow experiences stability.
hero member
Activity: 1134
Merit: 643
BTC, a coin of today and tomorrow.
Volatility is derived from the word Volatile.
A substance is said to be Volatile if it is able to change very rapidly within a priod of time. The rapidness is in most cases unpredictable which could lead to gain or loss. But in crypto, volatility is often emphasised for the lost aspect of it.

It is therefore correct to define volatility in cryptocurrency as the rate at which the prices of cryptocurrencies changes.
Volatility is good and bad.
It is good because it creates the movement that day traders need to make profits in the market.
It is bad because if it moves against you, you will run into losses.
Sorry if I am too elementary in my explanation  it is because your question looks elementary too. You may have the knowledge of what I'm saying, but I still need to share it, I never can tell who it may help.
legendary
Activity: 2268
Merit: 16328
Fully fledged Merit Cycler - Golden Feather 22-23
Hi can someone explain volatility with example, I understand what it kinda means but find it hard to implement in reality. Like for example if btc volatility is 4% does that means it goes up and down 4%? Everywhere i find it shows formulas which i am not interested in, I am interested in how I can implement it in my trading decisions.

Volatility is the amount of "error" trading prices have around their mean movement ("Drift").
The higher the volatility, the higher the movement, those variation from the straight line are wide.

Analytically, you can compute the volatility by computing the standard deviation of daily (log) returns and multiplying this number by sqrt(time)= sqrt(260) to obtain an annualised volatility.

Volatility of 40% means that there is a 68% probability the price after one year will have moved LESS than 40%  in either direction.

This explains how volatility can be used to trade: the higher the volatility, the higher the movement, the higher the trading opportunities.
Trading low volatility assets (STIRs, EURUSD) require very high leverage. Trading high volatility assets (BTC, TSLA) require less capital to have decent returns.

Volatility also plays a very important role in the diversification of a portfolio.
See:

Extracting stable positive return from high-volatile asset.HF recipe made simple
hero member
Activity: 1106
Merit: 912
Not Your Keys, Not Your Bitcoin
_snip_

You want something very realistic? Ok
Imagine having kerosene and methane gas in a closed cylinder, open the two at the same time, you will find out that the container carrying methane gas will quickly evaporate, the same analogy happens to cryptocurrency price volatility, it is very fast that's why it is always recommended to used stop loss on your trades as it may be difficult to exit a trade when the market is having a downtrend.
Use last week scenario of the Luna fiasco and the overall crypto market how they fell, it happens very fast that you can easily lose 50% of your position, that's why it is advisable to take caution if you are new to cryptocurrency, however, the reverse is very dope in the sense that bitcoin will help you beat other investment you ever had. It has proven to be and will continue to do so in the long run.
legendary
Activity: 2912
Merit: 6403
Blackjack.fun
Everywhere i find it shows formulas which i am not interested in, I am interested in how I can implement it in my trading decisions.

So, you're not interested in how it's actually calculated but you're interested in trading knowing the value.
Sorry but this is just like some dude who doesn't understand how an engine works but wants more power and torque from it.
Anyhow, if you're not keen to learn how it's done then simply straight to the question

Quote
Like for example if btc volatility is 4% does that means it goes up and down 4%?

No! First, it doesn't need to go in both directions and the way it is calculated will most likely not end with a 4% result.


copper member
Activity: 2800
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Leading Crypto Sports Betting & Casino Platform
Hi can someone explain volatility with example, I understand what it kinda means but find it hard to implement in reality. Like for example if btc volatility is 4% does that means it goes up and down 4%? Everywhere i find it shows formulas which i am not interested in, I am interested in how I can implement it in my trading decisions.

Simple answer to solve your problem about this volatility computation is to use an indicator on the chart that determines the volatility of a certain coin using a certain time span. Use Average True Range(ATR) indicator in your chart to determine the range of the movement of the coin that you are watching. It average all the movement that happened on the coin with a set time span. This is what I'm using to find the best coin to trade for a day and also for my stop loss setup.

Here's the tutorial of ATR: https://www.investopedia.com/terms/a/atr.asp
member
Activity: 898
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Do it For Better Humanity (Bitget trader)
Volatility is simply the rate at which the price of a particular asset move up or down.. So the reason why people say btc volatility is high is because it drops faster and go up faster than people expect. 
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