Definition: Volatility refers to the degree of variation in the price of a financial instrument, such as a currency pair, stock, or commodity, over a specific period. It is a measure of the speed and magnitude of price movements and is often used to assess the risk associated with a particular asset. High volatility indicates large price fluctuations, while low volatility suggests smaller, more stable price changes.
Understanding and analyzing volatility is crucial for effective trading and risk management. Volatility provides insights into market behavior, helping traders anticipate potential price swings and adjust their strategies accordingly. By monitoring volatility, traders can identify trading opportunities, set appropriate stop-loss and take-profit levels, and manage their risk exposure. Additionally, various financial instruments, such as options, are directly affected by volatility, making it a key factor in pricing and decision-making processes.
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