Definition
Volatility measures how widely an asset's returns swing around their average over a period, usually expressed as the annualized standard deviation of returns.
How it works
To calculate historical volatility, you take a series of returns, such as daily percentage changes, and compute their standard deviation, a statistic that shows how far values typically spread from their average. The result is then annualized: daily standard deviation × √252 for stocks, which trade on roughly 252 days a year, or × √365 for crypto, which trades every day. Providers differ in the period and data frequency they use, so published figures can vary.
Historical volatility describes what already happened. Implied volatility is derived from option prices and reflects how large the market expects future moves to be. Traders use volatility to compare assets, to size positions so that a normal move stays within their risk limit, and to set stop distances that everyday noise is unlikely to trigger.
Volatility says nothing about direction: a steady rise and a sharp fall can produce similar numbers. It also changes over time, often jumping during market stress, and a calm period does not mean that large moves cannot happen.
Example (hypothetical numbers)
Suppose Stock X has a daily standard deviation of returns of 1.5%, and Coin A has one of 4%.
Stock X annualized volatility = 1.5% × √252 ≈ 1.5% × 15.87 ≈ 23.8%.
Coin A annualized volatility = 4% × √365 ≈ 4% × 19.10 ≈ 76.4%.
Coin A's returns swing more than 3 times as widely as Stock X's, but neither number says whether either price will rise or fall.
Common mistakes
- Treating high volatility as a prediction that the price will fall.
- Comparing volatility figures calculated over different periods or data frequencies.
- Assuming that a recent calm period means volatility will stay low.
Related calculators
This glossary is for education only and is not investment advice. Examples use hypothetical numbers.