Volatility refers to the extent of price fluctuations in a financial instrument over a specific period. It is often used as a measure of risk, with higher volatility indicating a greater degree of price movement, and thus, more uncertainty about the asset’s future price. In financial markets, volatility is crucial for traders and investors as it impacts the potential for both profit and loss.

Volatility can be measured in several ways, with the most common being historical volatility and implied volatility. Historical volatility is based on past price movements and is calculated by assessing the standard deviation of returns over a given period. Implied volatility, on the other hand, is derived from the prices of options and reflects the market’s expectations of future price movements.

High volatility often occurs during periods of market uncertainty or economic events, such as earnings reports, geopolitical developments, or central bank announcements. These periods can present opportunities for traders looking to profit from significant price movements, but they also come with increased risk.

Conversely, low volatility is typically seen in stable markets with less frequent price changes, often leading to more predictable trading environments but with potentially lower returns.

Volatility is often visualized using tools such as Bollinger Bands, which expand and contract based on price fluctuations, or the Volatility Index (VIX), which measures the market’s expectation of volatility in the near term.