What to Trade as Beginner? Forex, Stocks, Options, Futures?
If you are new to trading, you may feel overwhelmed by the wide selection of instruments and investment products available: forex, stocks, ETFs, options, futures, bonds, commodities...? Which of these are the best to trade as a beginner? This guide looks at the popular instrument types and their advantages and disadvantages as trading vehicles for a less experienced trader. We will consider how easy [more ...]
Is MACD an Oscillator?
**MACD Is an Oscillator, But....** We can say MACD is an oscillator, as it oscillates around zero. But unlike most other oscillators, MACD has no (explicit) overbought and oversold areas. It also doesn't have a percentage or standardized scale (like 0 to 100 or -100 to 100). **MACD Units.** MACD is measured in the same units as the underlying market's price (dollars, euros) and theoretically there [more ...]
Why Is Volatility Proportional to the Square Root of Time?
**Annualizing Volatility.** When you want to annualize or de-annualize volatility (or transform volatility to any other time period), you need to multiply it by the square root of the time ratio, rather than the time ratio itself. For example, if you have monthly volatility and want to transform it to annual volatility, you multiply it by the square root of 12 and not by 12 directly. **Why Is Volatility [more ...]
Volatility Is Your Friend. Is It?
**Trend Is Your Friend. Is Volatility Too?.** "Trend is your friend" is a popular Wall Street saying that has been around for decades. It has its origin in the trend following trading style, which believes that it is better to ride long trends (up or down) rather than trying to pick exact tops and bottoms in the market. Along these lines, I have recently heard the phrases "Volatility is your friend" [more ...]
Is Volatility the Same as Variance?
**Is Volatility Variance? Are They the Same Thing?.** The answer is: Sometimes (very rarely) they may be considered the same. They are definitely closely related. But... Volatility (at least in finance) is usually understood as standard deviation rather than variance. **Volatility and Standard Deviation.** Standard deviation is one of the ways how to calculate and interpret volatility of securities [more ...]
Is Volatility the Same as Risk?
**Does Volatility Equal Risk? Are They the Same Thing?.** This question represents one of the most popular misconceptions in today's investment industry and public. A whole book would not be enough to answer this question. The short answer is: Volatility is probably the most popular way of expressing, understanding, and quantifying risk of investments. In that sense, volatility is the same as risk. [more ...]
Is Volatility and Standard Deviation the Same?
**Is Volatility Standard Deviation? Are They the Same Thing?.** The answer is yes and no. Let's start with what volatility and standard deviation are separately and then we will put them together and compare. **What Volatility Is.** In general, volatility is how much something tends to move. It is not necessarily a term limited to finance, but this website is about finance and investing, so I give [more ...]
Is Volatility an Asset Class?
With the growing media and public awareness of various volatility indices, derivatives, and exchange traded products (such as the VIX index or VXX ETN), many people wonder: Is volatility an asset class (like stocks, bonds, or commodities)? Let's break this question down into three questions in order to answer it: Is volatility technically considered an asset class? Is it correct to speak of volatility [more ...]
Is Volatility a Percentage?
There is some confusion regarding whether volatility (in finance) is a percentage or "just a number". **Is Volatility a Percentage?.** The simple answer is: Yes, usually volatility is a percentage. But it does not always need to be. Percent per annum is the most common unit of volatility in finance. It is a direct implication of the way volatility is usually calculated. Alternatively, you can also [more ...]
Is Volatility Variance or Standard Deviation?
**Volatility is Usually Standard Deviation, Not Variance.** In finance, volatility is usually understood as standard deviation. Of course, variance and standard deviation are very closely related (standard deviation is the square root of variance), but the common interpretation of volatility is standard deviation of returns, and not variance. Here you can find more details: Is Volatility and Standard [more ...]
Is Volatility Sigma or Sigma Squared?
**Volatility (in Finance) Is Sigma, Not Sigma Squared.** If you are asking this question I assume that you know that sigma denotes standard deviation, while sigma squared denotes variance in statistics. Variance is standard deviation squared. Standard deviation is the square root of variance. Volatility, as it is commonly understood, calculated, and interpreted in finance, is the standard deviation [more ...]
Is Volatility Mean Reverting?
The answer is yes, volatility does revert to its mean. This is true for both realized and implied volatility, which are of course closely related. Nevertheless, volatility is not necessarily mean reverting on all time horizons. I will illustrate it on the VIX index, which is the best known volatility index. Its official name is CBOE Volatility Index and it measures 30-day implied volatility of S&P500 [more ...]
Is Volatility Good for Traders?
**Is High Volatility Good for Traders?.** Let's break this question down to two in order to explain it: Is high volatility good for traders in the short term? Is high volatility good for traders in the long term? Note that by traders I also mean investors. The difference between traders and investors is only in time horizon and frequency of trades, but the effects of volatility are the same. **Is Volatility [more ...]
Is Volatility Constant?
**Volatility Is Not Constant.** The answer to the question is very simple: Volatility is anything but constant. In fact, historical volatility of many securities has been more volatile than the securities themselves. **Volatility Value Range.** Theoretically, volatility can reach any value from zero to positive infinite. Here you can find more detailed explanation: Can Volatility Be Negative? (No). [more ...]
Can You Buy a Volatility Index?
**You Can Not Buy a Volatility Index.** Volatility indices have become quite popular in the recent years. Especially the VIX (CBOE Volatility Index) has been frequently mentioned in media, often as the so called "fear index". Many people wonder if they can actually buy indices like the VIX, especially when they are very low and it is obvious to everybody that they must go up sooner or later. Unfortunately, [more ...]
Can Volatility Be Zero?
**Yes, Volatility Can Be Zero.** Volatility can reach values from zero (inclusive) to positive infinite. It can not be negative. **When Is Volatility Zero?.** Being the bottom of the value range, zero is obviously a very special case of volatility. Volatility is zero if there are no changes in the price (the price is constant). For example, if there was a stock and its price would stay at 20 dollars [more ...]
Can Volatility Be Over 100?
Can volatility be over 100? Most of the time when people are asking this question they actually mean if volatility can be over 100 percent p.a., because in finance volatility is usually measured and quoted in percent annualized. The short answer to this question is: Yes, volatility can be over 100%. Volatility can theoretically reach values from zero (no volatility = constant price) to positive infinite. [more ...]
Can Volatility Be Negative?
Although it may seem obvious to a professional, this question is quite frequently asked by people less experienced with options and volatility: Can (historical or implied) volatility be a negative number? **Volatility Can Never Be Negative.** Historical volatility, as well as implied volatility and volatility in general, can never be negative. In other words, it can reach values from zero to positive [more ...]
Can Volatility Be Greater than 1?
**Volatility Value Range.** Can volatility be greater than 1? This is one of the typical questions concerning the possible value range of volatility (in finance). First I give you a short answer: Yes, it can be greater than 1. When people are asking this question, they actually usually mean if volatility can be greater than 100%, because it is common to measure and quote volatility of investment returns [more ...]