Volatility is one of the most noticeable characteristic of any financial market. Actually, volatility is one of the main factors which determine the profitability and popularity of an instrument or a market. It is defined as the deviation or dispersion of the price of a product or value of an index from the mean value. Volatility is usually measured using standard deviation. The value changes of the instrument or index is grouped and plotted using moving average. The standard deviation is small when there is low volatility and is large when there is high volatility.
Intraday price volatility affect short term traders and scalpers and long-term price volatility affects position traders and investors. Researches shows that volatility affects market performance. Generally, in rising markets have relatively low volatility and declining markets have higher volatility. Volatility is also directly proportional to risk. The overall return from the market also declines when the market is volatile.
The fact that price volatility is influenced by lot of factors in addition to the supply-demand. Some common factors include interest rate changes, oil price changes, inflation trends, industry or company or market performance reports, and economic policy changes.
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