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Market volatility usually refers to wide swings in price and heavy trading.
So it simply means the frequency and severity of which the market price of a security fluctuates.
The more swings in a shorter period of time = High volatility.
Volatility is often a result of an imbalance of trade orders going in one direction.
For example, if all the orders placed are buys and there no or very few sells.
There can be various causes for an imbalance of trade orders which we will take a look at in this article.
We will also be taking a look at how market volatility can affect your trading.
What Causes Volatility?
Volatility happens when uncertainty occurs for the risk involved to a security’s change in value.
This basically means that a security’s value can spread out over a larger range.
With such a large range it means the price of the security can change dramatically in either direction within short period.
With lower volatility a security’s value will be more steady and not fluctuate dramatically.
The main driving force of volatility is market sentiment.
The following can have big influences on sentiment:
- Economic news such as a data release or central bank announcement.
- Interest rate changes.
- Political developments such a change in political leadership.
- Company news such as a new product.
- Recommendation from well-known analysts.
- Heard mentality, traders following other traders.
Any one of these has the potential to alter market sentiment and create volatility.
So we know what volatility is and what causes it but is there a way to measure it?
Standard deviation is typically the standard statistic used to measure market volatility.
The standard deviation shows how tightly clustered around or how spread out a set of data is from the mean or average of that data.
Affects On Market Volatility On The Markets
During times of volatility there can be some big impacts on the markets which in-turn can effect your trading.
- Delayed execution: There can be delays in execution caused by high volumes of trading during market volatility.
High volumes can also cause executions to be at prices that are different from quote given at the time of placing the order.
- Digital disruption: The systems capacity might make it difficult to execute your trades.
Also, high levels of internet traffic might make it difficult to access your trading account.
- Questionable Market Trends: During times of market volatility it can be difficult to identify market trends.