Volatility Ratio

  

Categories: Derivatives, Metrics

Volatility measures how much a stock price (or any other asset price) is likely to move over a period of time.

Think of it in terms of emotion. You have a volatile friend. At the beginning of the night, they can be smiling and laughing and generally having a good time. An hour later, they're ugly-crying in a bathroom stall. Very volatile.

Some stock prices are like that as well: $20 today...$8 tomorrow...rally to $35 next week. Very volatile. The volatility ratio represents a technical indicator meant to compare near-term price movements with its longer-term volatility.

To calculate the measure, first look at a stock's price range for the day. Subtract its low price from its high price. That equation gives you today's range, known as the TTR (today's true range). Then figure out the ratio of the TTR with the longer-term volatility. This second part gets measured by the average true range for whatever period you're looking at (50 days, 200 days, etc.). The ratio then looks at today's range versus the average range over a period of time. How much more (or less) volatile is the stock today compared to its recent average? That question represents the heart of the volatility ratio.

The measure is meant to clue investors into possible changes in a stock's behavior, predicting breakouts or other changes in its chart pattern.

Related or Semi-related Video

Finance: What is Volatility?77 Views

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In finance allah shmoop what is volatility beta this thing

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that's the symbol for volatility on the street we mean

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the wall one not the mean one and it is

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so commonly used that the in crowd members just say

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beta when they're referring to volatility unless they're from tennessee

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in which case they say you ve all y'all all

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right so here's a siri's of stock prices stamped each

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day that has lo ve all or low beta and

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here's a siri's that has high beta dead man's pulse

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versus rocky mountains Well what makes a stock volatile uncertainty

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Think about it this way If everyone knew for sure

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what a given stocks earnings would be for the next

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ten years quarter by quarter and they also knew what

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the overall markets average earnings would be in a few

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other things like revenue growth and world conditions and we're

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going to be war inflation there wouldn't be a lot

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of guesswork The quote right unquote price today would be

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thirty two dollars eighty three cents and the quote right

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unquote rate of compounding would be eight percent in the

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stock would slowly go up but this rate but in

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non disney land riel life well nobody really knows much

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of anything So stockcharts look like this and nerve endings

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of wall street traders look like this Neither of them 00:01:19.771 --> [endTime] looked much like this chart So that's all you

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