Volatility Trading Strategies for Beginners | An Introduction

Part of the course Volatility Trading Strategies for Beginners: https://quantra.quantinsti.com/course/volatility-trading-strategies Welcome to this course on Volatility Trading Strategies for Beginners. Firstly, let us try to understand what volatility stands for. Volatility is nothing but the upward or downward fluctuations in the prices of an asset, over a given period of time. For example, assume the close prices of an asset are represented by the green line, and the red line represents the mean price. Then, the simplest way to measure the volatility here would be to calculate the deviation of the prices from their mean. Now here’s an example of the daily returns plotted for two stocks from June to December 2020. Will you be able to tell which stock is highly volatile and which one is low? In the left graph, the daily returns are hovering between -4% and 6%. Whereas in the second graph the returns are moving from -20% to 15%. Based on this, we can conclude that Tesla is a highly volatile stock and Coca-cola is a less volatile stock. You might be aware that volatility is often associated with uncertainty and panic in the markets. For instance, we have Sophie who is a short term trader. Sophie has observed that whenever markets turn volatile, her stop-loss orders often get triggered due to the larger swings in prices. Due to this, she often ends up exiting her trades with a loss. On the other hand, we also have Henry. Henry likes picking stocks for the long term. However, wh