Volatility in Stock Market – A Friend or Enemy

Stock Market is very lucrative place to earn the money but when we talk about risk in market it is certainly a big question for investors . If we really see the matter in deep then we will found risk in stock market is nothing but it is actually volatility of price.

Volatility of stock price or index price mean how price of underlying securities fluctuate on daily basis in market.  Due to this reason some investor don’t want to invest because they are not able to understand volatility and its nature in trading. It is fact if you able to understand volatility then it is your friend otherwise it is a big enemy for investor.

How to Measure Volatility in Stock Market :

There are lot of tools in stock market which help you to understand volatility but we will discuss some important tools only which a investor can use on live market to earn profit from on daily basis. Technical analysis play a vital role to earn from stock market and without help of technical analysis volatility measure is also a challenge for investor.

  1. Volatility Index – VIX
  2. Average True Range – ATR

 What is  Volatility Index : –

                                         India VIX is a volatility index based on the index option prices of Nifty. It is computed by using the best bid and ask quotes of the out of the money, present and near month Nifty option contracts. VIX is designed to indicate investors’ perception of the annual market volatility over the next 30 calendar days, higher the India VIX, higher the expected volatility and vice-versa. 

Measurement of Vix :

Sr. No. Vix Level Interpretation
1. 0 -10 Market is one side either pure bullish or bearish market
2. 11 – 15 Normal Volatility
3  16 – 20 Good Volatility for Trader
4 21 & above High Volatility – very Good for trader

How it Works : –

                             Lets suppose Vix is 12 in market and Nifty level is 12000 then it means annual volatility is 1% monthly ( 12 /12 month ) and Nifty can move 1% positive or negative during that time.

Nifty range for trading is 12000 + 120 or 12000 – 120 for that time period. If Vix go on high side from 12 then its vice versa.

What is Average True Range  – ATR : –

                                                                         ATR is developed by Mr.  J. Welles Wilder in 1970 and give a gift to trader to earn profit in market.

  • Wilder started with a concept called True Range (TR), which is defined as the greatest of the following:
  • Method 1: Current High less the current Low
  • Method 2: Current High less the previous Close (absolute value)
  • Method 3: Current Low less the previous Close (absolute value)

Interpretation  : – 

                             Lets suppose ATR of any individual stock is 40 rupees and stock price is 500 Rs. Then  its indicating that this particular stock can move in this range.  For example in upper side you can see movement up to 500 + 40 Rupees or 500 – 40 would be a trading  zone in down side.

ATR must be see on daily basis chart  not on  intraday   basis.

High ATR range indicating high volatility and low ATR indication lower volatility but it must be calculated in respect of stock price percentage not on numeric value of the ATR.

Example : –

ATR Example
ATR Example

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