Recently, I happened across an article that claimed that the local markets was going up because volatility had gone up this year. After careful consideration I thought…BULLSHIT. This touches on a topic that always irritates the living daylights out of me – volatility and trend are not the same thing and only people who have a limited grasp of markets think so. There are a few basic points regarding volatility that all traders should understand –
- Volatility is simply a measure of the speed and magnitude of an instruments price movement.
- Volatility is not directly observable.
- Volatility has no bias there is no such thing as upward or downward volatility so when you see a talking head on CNBC talking about upside volatility you can be assured that they are a fool .
- The greater the volatility, the greater the probability that a stock will either do well or do poorly.
Whenever you come across this sort of statement it is necessary to go directly to the evidence. the chart below is the average 30 day volatility of the ASX 200 for the years 2008/2014. It is quite clear that on an historical basis that volatility has been falling in the local market since the GFC.
Zooming in we can see the trajectory of volatility in the local market for this year. As you can see the overall trend in volatility this year has been mostly been down.
If we pan back you get a good sense of the collapse in volatility experienced by the market since the GFC – the very large peaks of previous years have simply evaporated along with investor interest.
In trading there are a few essential concepts that traders do need to master and an understanding of volatility is one of them. If you do not know what volatility is then dont write about it.