Volatility

Volatility is a technical indicator in technical analysis. Volatility refers to the average deviation from a mean value.

A high volatility in the share price for a stock can mean price movements both upwards and/or downwards. Stock prices may have periods of low volatility when the stock price barely moves and stock prices may have periods of high volatility when there are large price fluctuations in the stock. Volatility is usually measured by the standard deviation of the share price over a selected period. Volatility is important to measure and monitor because a high volatility can produce large gains or losses.

Standard deviation for sample: square root of((sum(deviations from the mean to the power of 2))/(number of observations - 1))

Standard deviation as a measure of volatility is calculated according to the same principles as for the moving average, the last observation is added while the oldest observation falls out of the calculation. Volatility can be calculated for different time periods, such as 10 days or 20 days. Volatility usually moves in cycles where low volatility is followed by high volatility and so on.