How to Test for Stock Market Volatility
In the stock market, volatility is probably the most important statistic besides price. When volatility is high, the market is likely to endure wide price swings. Conversely, low volatility suggests that prices will trade in a relatively narrow range. Some speculators see a volatile market as an opportunity for quick profits while more risk-averse investors may want to avoid high volatility. Whatever your perspective, it is important that you know how to test for stock market volatility.
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Instructions
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Plot Bollinger bands onto your price chart. You will notice that there are three bands on top of the price data. The middle band is a moving average, and the outer bands each represent one standard deviation away from the average based on historical price data.
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Use the expansion and contraction of the bands to gauge volatility. When volatility increases, the outer bands expand away from each other. When volatility decreases, the bands contract. Using Bollinger bands allows you to get a good idea of market volatility at a glance.
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Use trading volume as a supporting indicator. Generally, price moves that occur on high trading volume are considered more significant than moves that occur on low volume. If you see an increase in volatility on high volume, it is an indication that the stock will remain volatile for some time. On the other hand, an increase in volatility accompanied by low trading volume may just be a short-term aberration.
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