“Volatility” is the most important term which is used in the stock markets. Many investors use this term to manage their risk. It is simpler terms, means the fluctuation in a stock’s or any other underlying’s price, over a specific period of time. Volatility is divided into two categories. These are “Historical volatility” or HV and “Implied volatility” or IV. It has been defined as the historical fluctuation in the price of a particular stock or commodity, and the term “Implied volatility” is defined as the estimation of the volatility in the price. It is important for many investors as well as traders. This is important because it helps in estimating or calculating their risk. Traders are using Historical Volatility indicator to know how volatile a stock or an index will be in the future.
The used of Historical Volatility indicator in the estimation of future fluctuations in an asset. The risk associated with each asset could be measured by HV. In this indicator, a stock which has a lesser historical volatility than the other tends to be less volatile and more stable in the coming future. This indicator use to buy a stock low and sell high because the particular stock is exhibiting higher volatility and hence, the range for the stock is higher than the other ones. Historical Volatility indicator is a little complicated and must have defined time frame. In this indicator, many professionals do waste a good amount of time in defining their time frames, and that is definitely essential and returns for the selected stock must be calculated. The volatility of an index is measured using “VIX” or Volatility Index, for a particular country which is increases in value, when the markets fall. In that case, that risk and volatility, both increase when markets fall. The VIX remains stable in an uptrend. In India, we use INDIAVIX to judge the volatility of the market.
Historical Volatility indicator is available under the studies section in Zerodha Kite. One can attach this technical indicator and the default parameter of this indicator is 10-periods. One can also input the trading days in a year and also input the standard deviation value.
Advantages of Historical Volatility Indicator :
- “Historical Volatility” is used by many investors to manage their portfolios as well as their risks and goals.
- This indicator is used by traders for selecting high beta stocks for trading purposes.
- It is used to estimate the future volatility in a particular stock or an index.
Disadvantages of HV :
- HV is not necessary for a stock’s volatility to always follow its historical volatility.
- The assumptions used while calculating the Historical volatility of a stock, tend to deteriorate the perfect value of it on a short-term basis.
HV is an important technical term, which is used by investors, throughout the world. The classification of HV as a subject in technical analysis can’t be done, as it doesn’t suit into any of the technical analysis categories. It is a standard deviation. Historical Volatility indicator can rather be called as an investor’s tool to manage risk. We suggest using this on either daily, weekly or monthly time frame to calculate the volatility of that time frame.
Ankita has done her Diploma Engineering in Computer Science & Technology. She is pursuing her degree in Engineering and also well experienced in the equity market and real estate related content writing. She is the one who has developed the technical indicators section of our site.