Historical Volatility Indicator plays a significant role by helping traders assess the rate of unpredictability for a specific asset or security over a given period. Historical volatility indicator can follow up on price deviation from the average price over a set timeframe. However, it cannot determine the price’s future direction, but it accurately measures cost variation from the historical average. When comparing the Volatility of one stock with another stock or just the same stock, historical Volatility comes in handy. ( Click this link to access an economic calendar for your trading strategies )
To properly understand the Historical Volatility Indicator, always remember that the lower the Historical Volatility, the lower the Volatility of the underlying market. The higher the Historical Volatility, the higher the Volatility of the primary market.
Using Historical Volatility for Trading
It is convenient for measuring asset volatility. This means that the rising of the Historical Volatility indicates a faster and more frequent change in price between high and low prices. It is also an indication of uncertainty regarding that particular asset, and that change is inevitable.
It is advisable to combine it with trend lines and oscillators that are easy to use while making it more apt to assess risk and determine stop-loss levels. Traders are advised that combining the Historical Volatility with whichever oscillator does not guarantee success.
Comparison Between Historical Volatility and Implied Volatility
• Implied Volatility contrasts with historical Volatility as it is a futuristic perceptive metric used to calculate the probability by options traders.
• Implied Volatility uses supply and demand to represent an underlying stock’s expected variation over a set time frame.
• Historical Volatility allows traders to use past trading ranges of underlying indexes and securities to calculate price change.
• Unlike Implied Volatility, Historical Volatility calculations are based on the change of price from one closing price to another.
In conclusion, Historical Volatility readings serve as a baseline, while Implied Volatility defines option premiums’ relative values. When the two measures’ value is the same, options premiums are fairly valued based on historical norms.
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