Market volatility measures how much the price of an asset varies over a period, without saying in which direction. High volatility means large swings (up or down); low volatility means small moves. It is measured with tools such as the standard deviation of returns or the ATR, but neither is a maximum loss or a forecast: they describe what has happened or what the market is pricing in.
Types of volatility
| Type | What it is | Where it is observed |
|---|---|---|
| Historical | Actual variation of past prices | Calculated from chart data |
| Implied | Variation that the options market is pricing in | Indices such as the VIX, options derivatives |
| Intraday | Size of movement within the session | Candle range, ATR on short timeframes |
Historical volatility looks backwards; implied volatility reflects expectations and can be wrong.
How it is measured
Standard deviation of returns
It measures the dispersion of returns around their mean. Illustrative example with four daily returns: +2%, −2%, +1%, −1%. The mean is 0. The squares are 4, 4, 1 and 1, which add up to 10. With the sample standard deviation we divide by 3 (n − 1): 10 ÷ 3 = 3.33; the square root is 1.83% per day. To annualise using the 252-session convention, multiply by the square root of 252 (≈ 15.87): 1.83 × 15.87 ≈ 29% annualised. This is an exercise, not market data.
ATR (Average True Range)
The true range of a candle is the largest of: high − low, |high − previous close| and |low − previous close|. The ATR averages those values over N periods. Illustrative example with a gap: previous close 100; today's high 108 and low 105. High − low = 3; |108 − 100| = 8; |105 − 100| = 5. The true range is 8, much larger than the candle's own range (3), because it includes the jump.
What to do and not do with the figure
- Do: compare current volatility with the usual level for the asset and timeframe; check the economic calendar, because events raise it; allow for wider spreads when volatility is high (see spread, swap and slippage).
- Do not: read the ATR as the maximum loss of a trade, or volatility as a direction signal or an instruction to buy or sell.
Volatility and position size
When volatility is higher, a stop of the same size in points is reached more easily, which is why many people adjust position size to the risk they choose to accept. The mathematical calculation depends on the chosen risk, the stop and the contract specifications; see the risk management guide. Leverage amplifies the effect: see forex leverage.
How AIM helps
AIM is AIMPATFX's quantitative artificial intelligence. AIM Market organises observable bias, scenarios and invalidation conditional on the data you provide, and AIM Risk calculates the mathematical position size with the risk you choose. It does not issue orders or guarantee outcomes; simulated scenarios are expressed as "X of N scenarios". See the quantitative methodology. The decision and the risk are the user's.
Frequently asked questions
Is high volatility the same as high risk?
It usually implies wider movements and therefore more uncertainty, but actual risk depends on position size and the stop.
Does volatility show whether the price will rise or fall?
No. It measures the size of movements, not their direction.
What is the difference between ATR and standard deviation?
The ATR uses price ranges, including gaps; standard deviation measures the dispersion of returns.
What is the VIX?
It is an implied-volatility index for the S&P 500 calculated from options; check the issuer's official definition.
Sources and review: conceptual content with no market figures, adapted on 16 October 2026; definitions should be checked against your platform's documentation and index issuers. Educational content; trading CFDs carries a risk of loss.
